As filed with the Securities and Exchange Commission on November 30, 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. 4 [X]
and
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 6 [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.
[X] on December 28, 1998 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.
[ ] 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 Financial Highlights, Appendix A
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, both of 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 ............................................................ 10
Behavioral Growth Fund ............................................. 10
Behavioral Value Fund .............................................. 11
Behavioral Long/Short Fund ......................................... 12
Special Small Cap Fund ............................................. 13
REIT Fund .......................................................... 14
Small Cap Value Fund ............................................... 15
Hidden Value Fund .................................................. 16
Core Equity Fund ................................................... 17
All Cap Value Fund ................................................. 18
International Equity Fund .......................................... 19
International Small Cap Equity Fund ................................ 20
All Funds .......................................................... 21
More Information About the Funds' Investments and Risk Considerations 22
Management of the Funds .............................................. 26
Portfolio Transactions ............................................... 28
How to Purchase Shares ............................................... 29
General Shareholder Services ......................................... 31
How to Redeem Shares ................................................. 31
Calculation of Performance Information ............................... 33
Dividends, Capital Gain Distributions and Taxes ...................... 33
Organization and Capitalization of the Trust ......................... 34
Appendix A--Fund Performance ......................................... A-1
</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. The information about each Fund's
Institutional Class shares shown below is based on annualized projected
expenses of the Institutional Class shares for the fiscal year that ends on
August 31, 1999. 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 1.00%(2) 1.00%(2)
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.
(continued)
4
<PAGE>
<TABLE>
<CAPTION>
Special Small
Small Cap REIT Cap 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
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 .............................. Fees vary from 0.65% 1.05% 1.05%
to 1.65% based on the
investment 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) ............................ Expenses vary from 1.20% 1.40% 1.40%
to 2.20% based on, among
other things, the investment
performance of the Fund
relative to a benchmark (2)
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.
(continued)
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
reimbursements) ............................ 1.30% 0.99% 0.99%
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.
(continued)
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 ................................ 1.00%(2) 1.00%(2)
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 1.76% and 2.71%, respectively, for the Behavioral
Growth Fund; 2.27% and 3.32%, respectively, for the Behavioral Value Fund;
2.32% and 3.87%, respectively, for the Behavioral Long/Short Fund; 1.22% and
2.37%, respectively, for the Special Small Cap Fund; 1.32% and 2.37%,
respectively, for the REIT Fund; 1.41% and 2.46%, respectively, for the Small
Cap Value Fund; 9.71% and 10.66%, respectively, for the Hidden Value Fund;
7.87% and 8.61%, respectively, for the Core Equity Fund; 30.28% and 31.02%,
respectively, for the All Cap Value Fund; 1.61% and 2.56%, respectively, for
the International Equity Fund; and 1.61% and 2.76%, respectively, for the
International Small Cap Equity Fund. See "Management of the Funds -- Advisory
and Sub-Advisory Fees."
7
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period
<TABLE>
<CAPTION>
Behavioral Special Small Cap
Growth Small REIT Value
Fund Cap Fund Fund Fund
------------------ ------------------- ------------------- -------------------
Institutional Institutional Institutional Institutional
Class(1) Class(1) Class(1) Class(1)
------------------ ------------------- ------------------- -------------------
Period Period Period Period
ended ended ended ended
August 31, August 31, August 31, August 31,
1998 1998 1998 1998
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period ................ $ 12.50 $ 12.50 $ 12.50 $ 12.50
Income from Investment Operations:
Net investment income (loss) (+) ................... (0.02) (0.03) 0.20 0.00(A)
Net realized and unrealized gain (loss)
on investments .................................... (0.62) (2.07) (2.06) (1.60)
--------- ---------- ---------- --------
Total income (loss) from Investment Operations (0.64) (2.10) (1.86) (1.60)
--------- ---------- ---------- --------
Net increase (decrease) in net asset value from
operations ......................................... (0.64) (2.10) (1.86) (1.60)
--------- ---------- ---------- --------
Net Asset Value, end of period ...................... $ 11.86 $ 10.40 $ 10.64 $ 10.90
========= ========== ========== ========
Total Return ........................................ (5.12)%** (16.80)%** (14.88)%** (12.80)%**
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ................ $ 5,254 $ 11,286 $ 9,122 $ 13,849
Ratios to average net assets:
Net investment income (loss) including
reimbursement .................................... (0.35)%* (0.51)%* 4.85%* 0.15%*
Operating expenses including reimbursement ......... 1.30%* 1.70%* 1.40%* 1.40%*
Portfolio Turnover Rate ............................. 67%** 9%** 52%** 10%**
Average Commission Rate Paid ........................ $ 0.0439*** $ 0.0534*** $ 0.0532*** $ 0.0587***
</TABLE>
+ The operating expenses of the Fund may reflect a reduction of the Adviser
fee, an allocation of expenses to the Investment Adviser, or both. Had such
actions not been taken, the ratios and net investment income (loss) per
share would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) ....................... (5.08)%* (3.13)%* 1.63%* (3.32)%*
Operating Expenses ................................. 6.03%* 4.32%* 4.62%* 4.87%*
Net investment income (loss) per share ............. $(0.27) $(0.15) $0.07 $(0.08)
</TABLE>
- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Institutional Class commenced investment operations on:
Behavioral Growth Fund--12/31/97; Special Small Cap Fund--12/30/97; REIT
Fund--01/01/98 and Small Cap Value Fund--12/30/97.
(A) Represents less than $0.005 per share.
The above information (except for the information relating to the average
commission rate paid by the Funds) has been audited by Deloitte & Touche LLP,
independent auditors. The report of Deloitte & Touche LLP is incorporated by
reference in the Trust's SAI and may be obtained by shareholders upon request
and without charge. These Financial Highlights should be read in conjunction
with the other audited financial statements and related notes which are
incorporated by reference in the Trust's SAI.
A discussion of the performance of each Fund in the fiscal year ended
August 31, 1998, is included in the Trust's Annual Report for the fiscal year
ended August 31, 1998. Copies of the Trust's Annual Report are available upon
request and without charge. A comparison of the performance of each Fund's
Institutional Class over the life of the Fund with that of a benchmark
securities index is included in Appendix A to this Prospectus.
8
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
Selected data for a share of beneficial interest outstanding throughout the
period
<TABLE>
<CAPTION>
Hidden Core All Cap
Value Equity Value
Fund Fund Fund
------------------- ----------------- ------------------
Institutional Institutional Institutional
Class(1) Class(1) Class(1)
------------------- ----------------- ------------------
Period Period Period
ended ended ended
August 31, August 31, August 31,
1998 1998 1998
------------------- ----------------- ------------------
<S> <C> <C> <C>
Net Asset Value, beginning of period ..................... $ 12.50 $ 12.50 $ 12.50
Income from Investment Operations:
Net investment income (loss) (+) ........................ 0.03 0.05 0.06
Net realized and unrealized gain (loss)
on investments ......................................... (2.77) 0.20 (1.03)
---------- ------- ---------
Total income (loss) from Investment Operations ......... (2.74) 0.25 (0.97)
---------- ------- ---------
Net increase (decrease) in net asset value from
operations .............................................. (2.74) 0.25 (0.97)
---------- ------- ---------
Net Asset Value, end of period ........................... $ 9.76 $ 12.75 $ 11.53
========== ======= =========
Total Return ............................................. (21.92)%** 2.00%** (7.76)%**
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ..................... $ 925 $ 1,295 $ 289
Ratios to average net assets:
Net investment income (loss) including
reimbursement ......................................... 0.58%* 1.18%* 0.95%*
Operating expenses including reimbursement .............. 1.30%* 0.99%* 0.99%*
Portfolio Turnover Rate .................................. 74%** 46%** 36%**
Average Commission Rate Paid ............................. $ 0.0545*** $ 0.0618*** $0.0600***
</TABLE>
+ The operating expenses of the Fund may reflect a reduction of the Adviser
fee, an allocation of expenses to the Investment Adviser, or both. Had such
actions not been taken, the ratios and net investment income (loss) per
share would have been as follows:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) ............................ (15.16)%* (16.23)%* (41.18)%*
Operating Expenses ...................................... 17.04%* 18.40%* 43.12%*
Net investment income (loss) per share .................. $ (0.77) $ (0.68) $ (2.73)
</TABLE>
- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Institutional Class commenced investment operations on: Hidden
Value Fund--12/31/97; Core Equity Fund--12/31/97 and All Cap Value
Fund--12/31/97.
The above information (except for the information relating to the average
commission rate paid by the Funds) has been audited by Deloitte & Touche LLP,
independent auditors. The report of Deloitte & Touche LLP is incorporated by
reference in the Trust's SAI and may be obtained by shareholders upon request
and without charge. These Financial Highlights should be read in conjunction
with the other audited financial statements and related notes which are
incorporated by reference in the Trust's SAI.
A discussion of the performance of each Fund in the fiscal year ended August 31,
1998, is included in the Trust's Annual Report for the fiscal year ended August
31, 1998. Copies of the Trust's Annual Report are available upon request and
without charge. A comparison of the performance of each Fund's Institutional
Class over the life of the Fund with that of a benchmark securities index is
included in Appendix A to this Prospectus.
9
<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
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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.
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BEHAVIORAL VALUE FUND
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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, effective
as of January 1, 1999, Mark Moon have day-to-day responsibility for managing the
Fund's portfolio. Mr. Moon will join RJF Management effective as of January 1,
1999 as Vice President, Portfolio Manager. Prior to joining RJF Management, Mr.
Moon was employed as Chief Investment Officer at Heidt Capital Group, LLC from
1995 to 1998 and as Assistant Treasurer at AMGEN INC. from 1989 to 1995. For
more information about RJF Management and Mr. Fuller, see "Behavioral Growth
Fund" above.
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BEHAVIORAL LONG/
SHORT FUND
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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
similar 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, effective as of January 1, 1999, Mark Moon have day-to-day
responsibility for managing the Fund's long portfolio, and Mr. Stanske and,
effective as of January 1, 1999, Mr. Moon 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 Mr. Moon, see "Behavioral Value Fund" above.
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SPECIAL SMALL CAP FUND
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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
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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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SMALL CAP VALUE FUND
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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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HIDDEN VALUE FUND
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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 that 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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CORE EQUITY FUND
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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 since then as President
and Chief Investment Officer of the firm. 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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ALL CAP VALUE FUND
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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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INTERNATIONAL EQUITY FUND
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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, Australasia, 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.
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INTERNATIONAL SMALL CAP
EQUITY FUND
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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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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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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 termination at the option of the Fund or
the borrower. A Fund may pay reasonable administrative and
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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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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
24
<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
sub-adviser of the International Funds will consider the likely effects of
foreign taxes on the net yield available to such Funds and to 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 sub-adviser,
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, custodians 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.
25
<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 Custodial Trust Company. First Data
Distributors, Inc. (the "Distributor") is the distributor for all the Funds.
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 29, 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 29, 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.
26
<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 Fee
with respect to 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 total return of the Russell 2000 Index
exceeds the total return of the Fund by more than 2.5%.
** Maximum advisory fee rate even if the total return of the Fund exceeds the
total return of the Russell 2000 Index by more than 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 29, 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-
27
<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 29, 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 SEC 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. There is no assurance that the SEC will issue the
exemptive order. 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, 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 allocated 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
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
28
<PAGE>
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
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 par-
29
<PAGE>
ents, 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 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:
30
<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-
31
<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.
32
<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 and
do not reflect any applicable contingent redemption or exchange fee. Total
return would be lower if such redemption or exchange fee were included. Total
return may also be presented for other periods and on a cumulative (in addition
to average annual) basis. All data are based on a Fund's past investment results
and do not predict future performance. Quotations of investment performance for
any period when an expense limitation was in effect will be greater than if the
limitation had not been in effect.
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. 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.
33
<PAGE>
Certain designated dividends from the Funds are expected to be eligible for the
dividends-received deduction for corporate shareholders (subject to a holding
period requirement). However, any distributions received by a Fund from REITs
will not qualify for the dividends-received deduction. A Fund's investment in
REIT securities may require such Fund to accrue and distribute income not yet
received. In order to generate sufficient cash to make the requisite
distributions, the Fund may be required to sell securities in its portfolio
that it otherwise would have continued to hold (including when it is not
advantageous to do so). A Fund's investment in REIT securities also may result
in the Fund's receipt of cash in excess of the REIT's earnings; if the Fund
distributes such amounts, such distribution could constitute a return of
capital to Fund shareholders for federal income tax purposes.
First Data will send each investor and the Internal Revenue Service an annual
statement detailing federal tax information, including information about
dividends and distributions paid to the investor during the preceding year. Be
sure to keep this statement as a permanent record. A fee may be charged for any
duplicate information that an investor requests.
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.
34
<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.
<TABLE>
<S> <C>
Behavioral Growth Fund Charles Schwab & Co., Inc. (on behalf of certain of
its customers)
Behavioral Value Fund None*
Behavioral Long/Short Fund None*
Special Small Cap Fund Charles Schwab & Co., Inc. (on behalf of certain of
its customers)
REIT 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 Charles Schwab & Co., Inc. (on behalf of certain of
its customers)
All Cap Value Fund Undiscovered Managers, LLC
BankBoston, custodian for Charles L. Edson IRA
International Equity Fund None*
International Small Cap Equity Fund None*
</TABLE>
- ------------
* The Fund had not commenced operations as of November 15, 1998.
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.
35
<PAGE>
APPENDIX A
FUND PERFORMANCE
COMPARATIVE PERFORMANCE MEASUREMENT: GROWTH OF A $10,000 INVESTMENT IN A
FUND'S INSTITUTIONAL CLASS SHARES AND A BENCHMARK SECURITIES INDEX
BEHAVIORAL GROWTH FUND
[TABULAR REPRESENTATION OF LINE CHART]
12/97 2/98 5/98 8/98
Behav Gro Inst $10,000 $11,240 $11,384 $9,488
Russell 2500 Growth Index $10,000 $11,062 $10,833 $7,805
Total Return from 12/31/97 (commencement of operations) to 8/31/98 = (5.12)%
[END OF LINE CHART]
SPECIAL SMALL CAP FUND
[TABULAR REPRESENTATION OF LINE CHART]
12/97 2/98 5/98 8/98
Special Small Inst $10,000 $10,408 $10,784 $8,320
Russell 2000 Index $10,000 $10,827 $10,724 $7,958
Total Return from 12/30/97 (commencement of operations) to 8/31/98 = (16.80)%
[END OF LINE CHART]
REIT FUND
[TABULAR REPRESENTATION OF LINE CHART]
1/98 2/98 5/98 8/98
REIT Inst $10,000 $9,704 $9,680 $8,512
Morgan Stanley REIT Index $10,000 $9,796 $9,589 $8,071
Total Return from 1/1/98 (commencement of operations) to 8/31/98 = (14.88)%
[END OF LINE CHART]
SMALL CAP VALUE FUND
[TABULAR REPRESENTATION OF LINE CHART]
12/97 2/98 5/98 8/98
Small Cap Val Inst $10,000 $10,736 $11,672 $8,720
Russell 2000 Index $10,000 $10,827 $10,724 $7,958
Total Return from 12/30/97 (commencement of operations) to 8/31/98 = (12.80)%
[END OF LINE CHART]
Each of the illustrations above compares a $10,000 investment made in
Institutional Class shares of a Fund on the date of the commencement of
operations of such Fund to a $10,000 investment made in a benchmark securities
index on such date. All index and Fund performance assumes reinvestment of
distributions. Total return information provided for the period beginning with
the commencement of operations of a Fund through 8/31/98. Past performance
cannot predict future results. Performance results reflect any voluntary
limitations and waivers of Fund expenses by Undiscovered Managers. Absent these
expense limitations and waivers, performance results would have been lower. Each
index's performance has not been adjusted for ongoing management, distribution
and operating expenses and sales charges applicable to mutual fund investments.
It is not possible to invest directly in an index.
A-1
<PAGE>
HIDDEN VALUE FUND
[TABULAR REPRESENTATION OF LINE CHART]
12/97 2/98 5/98 8/98
Hidden Val Inst $10,000 $10,696 $11,680 $7,808
Russell Mid Cap Index $10,000 $10,851 $11,040 $8,954
Total Return from 12/31/97 (commencement of operations) to 8/31/98 = (21.92)%
[END OF LINE CHART]
CORE EQUITY FUND
[TABULAR REPRESENTATION OF LINE CHART]
12/97 2/98 5/98 8/98
Core Equity Inst $10,000 $10,824 $11,296 $10,200
S&P 500 Index $10,000 $11,034 $11,515 $10,143
Total Return from 12/31/97 (commencement of operations) to 8/31/98 = 2.00%
[END OF LINE CHART]
ALL CAP VALUE FUND
[TABULAR REPRESENTATION OF LINE CHART]
12/97 2/98 5/98 8/98
All Cap Val Inst $10,000 $10,928 $11,520 $ 9,224
S&P 500 Index $10,000 $11,034 $11,515 $10,143
Total Return from 12/31/97 (commencement of operations) to 8/31/98 = (7.76)%
[END OF LINE CHART]
Each of the illustrations above compares a $10,000 investment made in
Institutional Class shares of a Fund on the date of the commencement of
operations of such Fund to a $10,000 investment made in a benchmark securities
index on such date. All index and Fund performance assumes reinvestment of
distributions. Total return information provided for the period beginning with
the commencement of operations of a Fund through 8/31/98. Past performance
cannot predict future results. Performance results reflect any voluntary
limitations and waivers of Fund expenses by Undiscovered Managers. Absent these
expense limitations and waivers, performance results would have been lower. Each
index's performance has not been adjusted for ongoing management, distribution
and operating expenses and sales charges applicable to mutual fund investments.
It is not possible to invest directly in an index.
A-2
<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 AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
CUSTODIANS
The Bank of New York
48 Wall Street
New York, New York 10286
Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
<PAGE>
[LOGO] undiscovered managers(TM)
UNDISCOVERED MANAGERS FUNDS
INVESTOR CLASS
P R O S P E C T U S
DECEMBER , 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, Suite 1700
Dallas, Texas 75201
1-888-242-3514
<PAGE>
Investor 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. 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:
o Undiscovered Managers Behavioral Growth Fund (the "Behavioral Growth Fund")
is managed by RJF Asset Management, Inc.
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.
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 -- Investor Class shares and
Institutional Class shares. 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 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 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.
- --------------------------------------------------------------------------------
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 ................................................. 5
The Funds ............................................................ 7
Behavioral Growth Fund ............................................. 7
Small Cap Value Fund ............................................... 8
Hidden Value Fund .................................................. 9
Core Equity Fund ................................................... 10
All Cap Value Fund ................................................. 11
All Funds .......................................................... 12
More Information About the Funds' Investments and Risk Considerations 13
Management of the Funds .............................................. 15
Portfolio Transactions ............................................... 16
How to Purchase Shares ............................................... 17
General Shareholder Services ......................................... 19
How to Redeem Shares ................................................. 19
Calculation of Performance Information ............................... 20
Dividends, Capital Gain Distributions and Taxes ...................... 21
Organization and Capitalization of the Trust ......................... 21
Appendix A--Fund Performance ......................................... A-1
</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 directly or indirectly. The information about each Fund's Investor Class
shares shown below is based on annualized projected expenses of the Investor
Class shares for the fiscal year that ends on August 31, 1999. 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>
Behavioral 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
Maximum 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, recently-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 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 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
2.11% and 3.06%, respectively, for the Behavioral Growth Fund; 1.76% and 2.81%,
respectively, for the Small Cap Value Fund; 10.06% and 11.01%, respectively,
for the Hidden Value Fund; 8.22% and 8.96%, respectively, for the Core Equity
Fund; and 30.63% and 31.37%, respectively, for the All Cap Value Fund. See
"Management of the Funds -- Advisory and Sub-Advisory Fees."
4
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period
<TABLE>
<CAPTION>
Behavioral Small Cap Hidden
Growth Value Value
Fund Fund Fund
------------------- ------------------- -------------------
Investor Investor Investor
Class(1) Class(1) Class(1)
------------------- ------------------- -------------------
Period ended Period ended Period ended
August 31, August 31, August 31,
1998 1998 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net Asset Value, beginning of period ............................. $ 14.74 $ 13.45 $ 12.09
Income from Investment Operations:
Net investment income (loss) (+) ................................ 0.00 (A) 0.00 (A) 0.01
Net realized and unrealized gain (loss) on
investments ................................................... (2.89) (2.54) (2.34)
-------- -------- --------
Total income (loss) from Investment
Operations ................................................... (2.89) (2.54) (2.33)
-------- -------- --------
Net increase (decrease) in net asset value
from operations ................................................. (2.89) (2.54) (2.33)
-------- -------- --------
Net Asset Value, end of period ................................... $ 11.85 $ 10.91 $ 9.76
======== ======== ========
Total Return ..................................................... (19.61)%** (18.88)%** (19.27)%**
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ............................. $ 40 $ 31 $ 40
Ratios to average net assets:
Net investment income (loss) including
reimbursement ................................................. (0.35)%* 0.15%* 0.58%*
Operating expenses including
reimbursement ................................................. 1.30%* 1.40%* 1.30%*
Portfolio Turnover Rate .......................................... 67%** 10%** 74%**
Average Commission Rate Paid ..................................... $0.0439*** $0.0587*** $0.0545***
+ The operating expenses of the Fund may reflect a reduction of the Adviser fee, an allocation
of expenses to the Investment Adviser, or both. Had such actions not been taken, the ratios
and net investment income (loss) per share would have been as follows:
Net investment income (loss) .................................... (5.43)%* (3.67)%* (15.51)%*
Operating Expenses .............................................. 6.38%* 5.22%* 17.39%*
Net investment income (loss) per share .......................... $ (0.07) $ (0.04) $ (0.15)
</TABLE>
- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Investor Class commenced operations on July 31, 1998.
(A) Represents less than $0.005 per share.
The above information (except for the information relating to the average
commission rate paid by the Funds) has been audited by Deloitte & Touche LLP,
independent auditors. The report of Deloitte & Touche LLP is incorporated by
reference in the Trust's SAI and may be obtained by shareholders upon request
and without charge. These Financial Highlights should be read in conjunction
with the other audited financial statements and related notes which are
incorporated by reference in the Trust's SAI.
A discussion of the performance of each Fund in the fiscal year ended
August 31, 1998, is included in the Trust's Annual Report for the fiscal year
ended August 31, 1998. Copies of the Trust's Annual Report are available upon
request and without charge. A comparison of the performance of each Fund's
Investor Class over the life of such class with that of a benchmark securities
index is included in Appendix A to this Prospectus.
5
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
Selected data for a share of beneficial interest outstanding throughout the
period
<TABLE>
<CAPTION>
Core All Cap
Equity Value
Fund Fund
------------------- -------------------
Investor Investor
Class(1) Class(1)
------------------- -------------------
Period ended Period ended
August 31, August 31,
1998 1998
------------------- -------------------
<S> <C> <C>
Net Asset Value, beginning of period ...................... $ 14.75 $ 14.18
Income from Investment Operations:
Net investment income (loss) (+) ......................... 0.01 0.01
Net realized and unrealized gain (loss) on
investments ............................................ (2.01) (2.67)
-------- --------
Total income (loss) from Investment Operations ......... (2.00) (2.66)
-------- --------
Net increase (decrease) in net asset value from
operations ............................................... (2.00) (2.66)
-------- --------
Net Asset Value, end of period ............................ $ 12.75 $ 11.52
======== ========
Total Return .............................................. (13.56)%** (18.76)%**
Ratios/Supplemental Data:
Net Assets, end of period (in 000's) ...................... $ 43 $ 41
Ratios to average net assets:
Net investment income (loss) including
reimbursement .......................................... 1.18%* 0.95%*
Operating expenses including reimbursement ............... 0.99%* 0.99%*
Portfolio Turnover Rate ................................... 46%** 36%**
Average Commission Rate Paid .............................. $0.0618*** $0.0600***
+ The operating expenses of the Fund may reflect a reduction of the Adviser fee, an allocation
of expenses to the Investment Adviser, or both. Had such actions not been taken, the ratios
and net investment income (loss) per share would have been as follows:
Net investment income (loss) ............................. (16.58)%* (41.53)%*
Operating Expenses ....................................... 18.75%* 43.47%*
Net investment income (loss) per share ................... $ (0.21) $ (0.48)
</TABLE>
- ----------------
* Annualized
** Not Annualized
*** Not Audited
(1) The Fund's Investor Class commenced operations on July 31, 1998.
The above information (except for the information relating to the average
commission rate paid by the Funds) has been audited by Deloitte & Touche LLP,
independent auditors. The report of Deloitte & Touche LLP is incorporated by
reference in the Trust's SAI and may be obtained by shareholders upon request
and without charge. These Financial Highlights should be read in conjunction
with the other audited financial statements and related notes which are
incorporated by reference in the Trust's SAI.
A discussion of the performance of each Fund in the fiscal year ended
August 31, 1998, is included in the Trust's Annual Report for the fiscal year
ended August 31, 1998. Copies of the Trust's Annual Report are available upon
request and without charge. A comparison of the performance of each Fund's
Investor Class over the life of such class with that of a benchmark securities
index is included in Appendix A to this Prospectus.
6
<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.
7
<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.
8
<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 that 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.
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 since then as President
and Chief Investment Officer of the firm. 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.
10
<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.
11
<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"). 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.
12
<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
13
<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.
14
<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 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).
The Bank of New York is the custodian for all the Funds. First Data
Distributors, Inc. (the "Distributor") is the distributor for all the Funds.
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%
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>
15
<PAGE>
The Trust intends to apply for an exemptive order from the SEC 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. There is no
assurance that the SEC will issue the exemptive order. 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, at the expense of Undiscovered Managers. 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 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 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
reduce its fees and 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
16
<PAGE>
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.
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 (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 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
17
<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 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:
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.
18
<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. 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' 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
19
<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
20
<PAGE>
in a Fund. Total return may also be presented for periods and on a cumulative
(in addition to average annual) basis. All data are based on a Fund's past
investment results and do not predict future performance. Quotations of
investment performance for any period when an expense limitation was in effect
will be greater than if the limitation had not been in effect.
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
Internal Revenue Code of 1986, as amended (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. 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). 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 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 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
21
<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 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.
<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 Charles Schwab & Co., Inc. (on behalf of certain of its
customers)
All Cap Value Fund Undiscovered Managers, LLC
BankBoston, custodian for Charles L. Edson IRA
</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.
22
<PAGE>
APPENDIX A
FUND PERFORMANCE
COMPARATIVE PERFORMANCE MEASUREMENT: GROWTH OF A $10,000 INVESTMENT IN A
FUND'S INVESTOR CLASS SHARES AND A BENCHMARK SECURITIES INDEX
BEHAVIORAL GROWTH FUND
[TABULAR REPRESENTATION OF LINE CHART]
7/98 8/98
Behav Inv $10,000 $8,039
Russell 2500 Growth Index $10,000 $7,553
Total Return from 7/31/98 (initial offering of Investor Class shares) to
8/31/98 = (19.61)%
[END OF LINE CHART]
SMALL CAP VALUE FUND
[TABULAR REPRESENTATION OF LINE CHART]
7/98 8/98
Small Cap Val Inv $10,000 $8,104
Russell 2000 Index $10,000 $7,878
Total Return from 7/31/98 (initial offering of Investor Class shares) to
8/31/98 = (18.88)%
[END OF LINE CHART]
HIDDEN VALUE FUND
[TABULAR REPRESENTATION OF LINE CHART]
7/98 8/98
Hidden Val Inv $10,000 $8,073
Russell Mid Cap Index $10,000 $8,258
Total Return from 7/31/98 (initial offering of Investor Class shares) to
8/31/98 = (19.27)%
[END OF LINE CHART]
CORE EQUITY FUND
[TABULAR REPRESENTATION OF LINE CHART]
7/98 8/98
Core Equity Inv $10,000 $8,644
S&P 500 Index $10,000 $8,389
Total Return from 7/31/98 (initial offering of Investor Class shares) to
8/31/98 = (13.56)%
[END OF LINE CHART]
Each of the illustrations above compares a $10,000 investment made in Investor
Class shares of a Fund on the initial offering date of such Investor Class
shares to a $10,000 investment made in a benchmark securities index on such
date. All index and Fund performance assumes reinvestment of distributions.
Total return information provided for the period beginning with the initial
offering date of Investor Class shares of a Fund through 8/31/98. Past
performance cannot predict future results. Performance results reflect any
voluntary limitations and waivers of Fund expenses by Undiscovered Managers.
Absent these expense limitations and waivers, performance results would have
been lower. Each index's performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges applicable to
mutual fund investments. It is not possible to invest directly in an index.
A-1
<PAGE>
ALL CAP VALUE FUND
[TABULAR REPRESENTATION OF LINE CHART]
7/98 8/98
All Cap Val Inv $10,000 $8,124
S&P 500 Index $10,000 $8,389
Total Return from 7/31/98 (initial offering of Investor Class shares) to
8/31/98 = (18.76)%
[END OF LINE CHART]
The illustration above compares a $10,000 investment made in Investor
Class shares of the All Cap Value Fund on the initial offering date of
its Investor Class shares to a $10,000 investment made in the S&P 500
Index on such date. All index and Fund performance assumes
reinvestment of distributions. Total return information provided for
the period beginning with the initial offering date of Investor Class
shares of a Fund through 8/31/98. Past performance cannot predict
future results. Performance results reflect any voluntary limitations
and waivers of Fund expenses by Undiscovered Managers. Absent these
expense limitations and waivers, performance results would have been
lower. The S&P 500 Index's performance has not been adjusted for
ongoing management, distribution and operating expenses and sales
charges applicable to mutual fund investments. It is not possible to
invest directly in an index.
A-2
<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 AUDITORS
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 December , 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 .............................. 11
Portfolio Transactions and Brokerage ................................ 14
Description of the Trust ............................................ 16
How to Buy Shares ................................................... 18
Net Asset Value ..................................................... 18
Shareholder Services ................................................ 18
Redemptions ......................................................... 19
Income Dividends, Capital Gain Distributions and Tax Status ......... 20
Calculation of Total Return ......................................... 22
Performance Comparisons ............................................. 23
Financial Statements ................................................ 25
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 at least 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.
3
<PAGE>
In addition to the foregoing fundamental investment restrictions, it is
contrary to each Fund's present policy, which may be changed without
shareholder approval, to:
Invest in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the Trust (or the person designated by the
Trustees to make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Fund's net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
All percentage limitations on investments will apply at the time of the making
of an investment (except for the non-fundamental restriction set forth in the
immediately preceding paragraph) and shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of such
investment.
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 331/3% 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
4
<PAGE>
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.
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.
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.
5
<PAGE>
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 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
6
<PAGE>
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.
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.
- ------------
* Trustees who are "interested persons" (as defined in the Investment Company
Act of 1940) of the Trust or of the Trust's investment adviser,
Undiscovered Managers, LLC.
The address of each Trustee and officer of the Trust affiliated with
Undiscovered Managers, LLC ("Undiscovered Managers") is Plaza of the Americas,
700 North Pearl Street, Dallas, Texas 75201.
The Trust pays no compensation to its officers or to the Trustees listed above
who are officers or employees of Undiscovered Managers. Each Trustee who is not
an officer or employee of Undiscovered Managers is compensated at the rate of
$10,000 per annum. The Trust provides no pension or retirement benefits to the
Trustees but has adopted a deferred payment arrangement under which each
Trustee who is to receive fees from the Trust may elect not to receive such
fees on a current basis but to receive in a subsequent period an amount equal
to the value that such fees would have if they had been invested in each Fund
on the normal payment date for such fees. As a result of this method of
calculating the deferred payments, each Fund, upon making the deferred
payments, will be in the same financial position as if the fees had been paid
on the normal payment dates.
7
<PAGE>
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 Charles Schwab & Co., Inc. (on behalf of 69.51%
certain of its customers)
Behavioral Value Fund None* --
Behavioral Long/Short None* --
Fund
Special Small Cap Fund Charles Schwab & Co., Inc. (on behalf of 86.63%
certain of its customers)
REIT Fund Charles Schwab & Co., Inc. (on behalf of 82.45%
certain of its customers)
Small Cap Value Fund Charles Schwab & Co., Inc. (on behalf of 87.25%
certain of its customers)
Hidden Value Fund None --
Core Equity Fund Charles Schwab & Co., Inc. (on behalf of 78.94%
certain of its customers)
All Cap Value Fund Undiscovered Managers, L.L.C. 27.97%
BankBoston, custodian for Charles L. Edson 25.10%
IRA
International Equity Fund None*
International Small Cap None* --
Equity Fund
</TABLE>
- ------------
* The Fund had not commenced operations as of November 15, 1998.
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 Charles Schwab & Co., Inc. 69.70%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Jewish Community Foundation of the 13.35%
Jewish Federation of South Palm Beach
9901 Doria Klein Boulevard
Boca Raton, FL 33428
FTC & Co. 6.48%
Datalynx #846058621
House Account
P.O. Box 173736
Denver, CO 60217
Behavioral Value Fund None* --
Behavioral Long/Short Fund None* --
Special Small Cap Fund Charles Schwab & Co., Inc. 86.63%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
REIT Fund Charles Schwab & Co., Inc. 82.45%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
BankBoston Customer Rollover IRA 6.81%
FBO Myron DuBain
160 Sansome Street, 17th Floor
San Francisco, CA 94104
Small Cap Value Fund Charles Schwab & Co., Inc. 87.47%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Hidden Value Fund Charles Schwab & Co., Inc. 13.90%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Mark P. Hurley 6.29%
4121 Caruth Boulevard
Dallas, TX 75225
(continued)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Institutional Class Shares
- -----------------------------------------------------------------------------------------
Fund Name and Address % Ownership
- ------------------------------------- ----------------------------------- -----------
<S> <C> <C>
Hidden Value Fund (cont.) Michael B. Hermon 5.64%
David E. Hermon, CUST
P.O. Box 530
Marblehead, MA 01945
Ethan N. Hermon 5.64%
David E. Hermon, CUST
P.O. Box 530
Marblehead, MA 01945
Hassay Savage Co. 5.02%
10 Industrial Boulevard
Turners Falls, MA 01376
Core Equity Fund Charles Schwab & Co., Inc. 80.05%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Sofiya Balta 5.79%
1401 E. 10th Street, #128
Greenville, NC 27858
All Cap Value Fund BankBoston Customer IRA 28.63%
FBO Charles L. Edson
5802 Surrey Street
Chevy Chase, MD 20815
Mark P. Hurley 20.36%
4121 Caruth Boulevard
Dallas, TX 75225
BankBoston CUST 18.48%
James P. Nicholls IRA Rollover
737 Cole Street
San Francisco, CA 94117
Undiscovered Managers, LLC 17.84%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
BankBoston CUST IRA 10.43%
FBO Walter E. Grinder
4205 Minton Drive
Fairfax, VA 22032
International Equity Fund None* --
International Small Cap Equity Fund None* --
</TABLE>
- ------------
* The Fund had not commenced operations as of November 15, 1998.
Investor Class Shares
As of November 15, 1998, Undiscovered Managers owned of record 100% of the
outstanding Investor Class shares of the Behavioral Growth Fund, the Hidden
Value Fund, the Core Equity Fund and the All Cap Value Fund. In addition, as of
such date, Undiscovered Managers owned of record 77.02%, and Marion William
Blair and Analee Blair, JTWROS, P.O. Box 170938, Irving, Texas 75017, owned of
record 22.98%, of the outstanding Investor Class shares of the Small Cap Value
Fund.
10
<PAGE>
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>
Special Small Cap Fund 17,125.181 1.16%
Hidden Value Fund 7,320.644 6.29%
Core Equity Fund 5,289.140 2.18%
All Cap Value Fund 5,105.514 20.36%
</TABLE>
As of November 15, 1998, the Trustees and officers of the Trust owned
beneficially (i) less than one percent of the Institutional Class shares of the
Behavioral Growth Fund, the REIT Fund and the Small Cap Value Fund and (ii)
none of the Investor Class shares of any of the Funds. As of such date, the
Behavioral Value Fund, the Behavioral Long/Short Fund, the International Equity
Fund and the International Small Cap Equity Fund had not commenced operations.
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 the All Cap Value Fund.
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 $ 22,389 $ 22,389
Behavioral Value Fund -0-* -0-*
Behavioral Long/Short Fund -0-* -0-*
Special Small Cap Fund $ 61,497 $ 61,497
REIT Fund $ 36,513 $ 36,513
Small Cap Value Fund $ 31,827 $ 31,827
Hidden Value Fund $ 4,606 $ 4,606
Core Equity Fund $ 3,175 $ 3,175
All Cap Value Fund $ 1,260 $ 1,260
International Equity Fund -0-* -0-*
International Small Cap Equity Fund -0-* -0-*
</TABLE>
- ------------
* The Fund had not commenced operations as of August 31, 1998.
After December 29, 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.
11
<PAGE>
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. $14,139
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
REIT Fund Bay Isle Financial Corporation $24,342
Small Cap Value Fund J.L. Kaplan Associates, LLC $21,214
Hidden Value Fund J.L. Kaplan Associates, LLC $ 2,907
Core Equity Fund Waite & Associates, L.L.C. $ 1,715
All Cap Value Fund E.R. Taylor Investments, Inc. $ 680
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.
After December 29, 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 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
for each of the Funds except for the International Equity Fund and the
International Small Cap Equity Fund provides that Undiscovered Managers owns
all rights to and control of the name "Undiscovered Managers." The advisory
agreement for each of the International Equity Fund and the International Small
Cap Equity Fund provides that Undiscovered Managers owns all rights to and
control of the name "UM." Each 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" or "UM," as
applicable, 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.
12
<PAGE>
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 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>
- ------------
* The Fund does not currently have an Investor Class.
Undiscovered Managers may change or terminate these voluntary arrangements at
any time.
13
<PAGE>
ADMINISTRATOR
Pursuant to an Administrative Services Agreement between the Trust and
Undiscovered Managers, 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: $5,892 from the Behavioral
Growth Fund, $13,369 from the Special Small Cap Fund, $8,693 from the REIT
Fund, $7,578 from the Small Cap Value Fund, $1,212 from the Hidden Value Fund,
$1,073 from the Core Equity Fund and $426 from the All Cap Value Fund. These
amounts were subject to reduction and 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. Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey
08540, is the custodian for the Behavioral Long/Short Fund. The custodians hold
in safekeeping certificated 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 AUDITORS. The Funds' independent auditors 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.
14
<PAGE>
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 $ 14,632
Behavioral Value Fund -0-*
Behavioral Long/Short Fund -0-*
Special Small Cap Fund $ 34,920
REIT Fund $ 40,434
Small Cap Value Fund $ 36,083
Hidden Value Fund $ 3,627
Core Equity Fund $ 1,156
All Cap Value Fund $ 743
International Equity Fund -0-*
International Small Cap Equity Fund -0-*
</TABLE>
- ------------
* The Fund had not commenced operations as of August 31, 1998.
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 $ 7,101,041 $ 11,662
Behavioral Value Fund -0-* -0-*
Behavioral Long/Short Fund -0-* -0-*
Special Small Cap Fund $ 8,578,440 $ 25,667
REIT Fund $12,975,950 $ 31,252
Small Cap Value Fund $14,887,336 $ 33,691
Hidden Value Fund $ 1,926,828 $ 3,069
Core Equity Fund -0- -0-
All Cap Value Fund $ 541,934 $ 743
International Equity Fund -0-* -0-*
International Small Cap Equity Fund -0-* -0-*
</TABLE>
- -------------
* The Fund had not commenced operations as of August 31, 1998.
During the fiscal year ended August 31, 1998, the All Cap Value Fund purchased
securities of Merrill Lynch & Co., a regular broker of the Fund, that were
valued as of August 31, 1998 at $9,240.
15
<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
16
<PAGE>
the election of Trustees and the selection of the Trust's independent
accountants, but shareholders 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.
17
<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
18
<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
19
<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
20
<PAGE>
25% of the value of its total assets invested in the securities (other than
those of the U.S. government or other regulated investment companies) of any
one issuer or of two or more issuers which the Fund controls and which are
engaged in the same, similar or related trades and businesses. If it qualifies
for treatment as a regulated investment company, the Fund will not be subject
to federal income tax on income paid to its shareholders in the form of
dividends or capital gain distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of each
Fund's "required distribution" over its actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 plus undistributed amounts from
prior years. Each Fund intends to make distributions sufficient to avoid
imposition of the excise tax. Distributions declared by a Fund during October,
November or December to shareholders of record on a date in any such month and
paid by the Fund during the following January will be treated for federal tax
purposes as paid by the Fund and received by shareholders on December 31 of the
year in which declared.
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
21
<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 (i) 75 percent
or more of the income of which for the taxable year is passive income or (ii) at
least 50% of the assets of which (generally by value, but by adjusted tax basis
in certain cases), on average, produce or are held for the production of passive
income. 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 total return of (i) the Institutional Class
shares of each Fund from such Fund's commencement of operations 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)% (19.61)%**
(commencement of operations December 31, 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 30, 1997)
REIT Fund (14.88)% N/A***
(commencement of operations January 1, 1998)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Total Return* Total Return*
Fund (cont.) Institutional Class Investor Class
<S> <C> <C>
Small Cap Value Fund (12.80)% (18.88)%**
(commencement of operations December 30, 1997)
Hidden Value Fund (21.92)% (19.27)%**
(commencement of operations December 31, 1997)
Core Equity Fund 2.00% (13.56)%**
(commencement of operations December 31, 1997)
All Cap Value Fund (7.76)% (18.76)%**
(commencement of operations December 31, 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>
- ------------
* Not annualized.
** Investor Class shares first offered on July 31, 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. The rankings 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.
23
<PAGE>
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.
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.
MSCI-EAFE Small Cap Index. The MSCI-EAFE Small Cap Index contains over 1200
stocks of companies that (i) have market capitalizations of between $200
million and $800 million and (ii) are from any of 20 different countries with
Japan, United Kingdom, France and Germany being the most heavily weighted.
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
24
<PAGE>
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 publications including, but
not limited to, the publications included in Appendix A. In particular, the
performance of the Funds may be compared in some or all of these publications
to the performance of various indices and investments for which reliable
performance data is available and to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services. Such
publications may also publish their own rankings or performance reviews of
mutual funds, including the Funds. References to or reprints of such articles
may be used in the Funds' promotional literature. References to articles
regarding personnel of the sub-advisers who have portfolio management
responsibility may also be used in the Funds' promotional literature. For
additional information about the Funds' advertising and promotional literature,
see Appendix B.
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, 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.
25
<PAGE>
APPENDIX A
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
ABC and affiliates
Adam Smith's Money World
America On Line
Anchorage Daily News
Atlanta Constitution
Atlanta Journal
Arizona Republic
Austin American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CDA Investment Technologies
CFO
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
CompuServe
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghues Money Fund Report
Dorman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Fee Adviser
Financial News Network
Financial Planning
Financial Planning on Wall Street
Financial Research Corp.
Financial Services Week
Financial World
Fitch Insights
Forbes
Fort Lauderdale Sun Sentinel
Fort Worth Star-Telegram
Fortune
Fox Network and affiliates
Fund Action
Fund Decoder
Global Finance
(The) Guarantor
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Individual Investor
Institutional Investor
International Herald Tribune
Internet
Investment Advisor
Investment Company Institute
Investment Dealers Digest
Investment Profiles
Investment Vision
Investor's Daily
IRA Reporter
Journal of Commerce
Kansas City Star
KCMO (Kansas City)
KOA-AM (Denver)
LA Times
Leckey, Andrew (syndicated column)
Lear's
Life Association News
Lifetime Channel
Miami Herald
Milwaukee Sentinel
Money Magazine
Money Maker
Money Management Letter
Morningstar
Mutual Fund Market News
Mutual Funds Magazine
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Palm Beach Post
A-1
<PAGE>
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Securities Industry Management
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated column)
Toledo Blade
UPI
US News and World Report
USA Today
USA TV Network
Value Line
Wall Street Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
World Wide Web
Worth Magazine
WRKO
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 Prospectuses
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 N-1A.
(ii) Undiscovered Managers Behavioral Value Fund (the "Behavioral
Value Fund"): RJF Management--Incorporated by reference to
Post-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form N-1A.
(iii) Undiscovered Managers Behavioral Long/Short Fund (the
"Behavioral Long/Short Fund"): RJF Management--Incorporated
by reference to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form N-1A.
(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 N-1A.
(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 N-1A.
(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 N-1A.
(ix) UM International Equity Fund (the "International Equity
Fund"): Unibank Securities, Inc. ("Unibank")--Incorporated
by reference to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form N-1A.
(x) UM International Small Cap Equity Fund (the "International
Small Cap Equity Fund"): Unibank--Incorporated by reference
to Post-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form N-1A.
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 Custody Agreement between the Trust and Custodial Trust
Company is filed herewith.
(c) Form of Special Custody Account Agreement by and among the Trust,
Custodial Trust Company and Bear, Stearns Securities Corp. is
filed herewith.
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 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 is filed herewith.
(d) Form of Amended and Restated Expense Deferral Agreement between
the Trust and Undiscovered Managers relating to the Behavioral
Growth Fund, the Small Cap Value Fund, the Hidden Value Fund, the
Core Equity Fund and the All Cap Value Fund is filed herewith.
(e) 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.
(f) 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) Form of 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 is filed
herewith.
11. Consent of Independent Auditors is filed herewith.
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. Computations of Performance Data are filed herewith.
17. Financial Data Schedules are filed herewith.
18. Multi-Class Plan--Incorporated by reference to Post-Effective
Amendment No. 3 to the Registrant's Registration Statement on
Form N-1A.
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--Incorporated by reference to
Post-Effective Amendment No. 3 to the Registrant's Registration
Statement on Form N-1A.
(c) Shareholder Servicing Plan for Investor Class shares--Incorporated
by reference to Post-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form N-1A.
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 37
Behavioral Value Fund -0-
Behavioral Long/Short Fund -0-
Special Small Cap Fund 31
REIT Fund 22
Small Cap Value Fund 49
Hidden Value Fund 40
Core Equity Fund 15
All Cap Value Fund 8
International Equity Fund -0-
International Small Cap Equity Fund -0-
</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 1
Small Cap Value Fund 2
Hidden Value Fund 1
Core Equity Fund 1
All Cap Value Fund 1
</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 Kwok *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
Diana Calhoun
Managing Director None None
</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 Unibank, New York Managing Director
Chairman of the Board 13-15 West 54th Street
New York, New York 10019
John Joseph Mulligan Unibank, New York Director
Director 13-15 West 54th Street
New York, New York 10019
Peter Egelund Jensen None None
Chief Financial Officer
Henrik Rye Peterson None None
Chief Financial Officer
</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, Custodial Trust Company; 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 Custodial Trust Company is 101 Carnegie Center,
Princeton, New Jersey 08540; 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 Registrant, Undiscovered Managers Funds, certifies that
it meets all of the requirements for effectiveness of this amendment to its
registration statement pursuant to Rule 485(b) under the Securities Act of 1933
and 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 Miami,
and State of Florida on the 30th day of November, 1998.
UNDISCOVERED MANAGERS FUNDS
By: /s/ Mark P. Hurley
------------------------------------
Mark P. Hurley
Title: President
Pursuant to the requirements of 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 November 30, 1998
-----------------------------
Mark P. Hurley
/s/ * Mark P. Hurley Trustee November 30, 1998
-----------------------------
Roger B. Keating
/s/ * Mark P. Hurley Trustee November 30, 1998
-----------------------------
Matthew J. Kiley
/s/ * Mark P. Hurley Trustee November 30, 1998
-----------------------------
Robert P. Schmermund
/s/ * Mark P. Hurley Assistant Treasurer November 30, 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>
99.8(b) Form of Custody Agreement between the Trust and Custodial
Trust Company relating to the Behavioral Long/Short Fund.
99.8(c) Form of Special Custody Account Agreement by and among the
Trust, Custodial Trust Company and Bear, Stearns Securities
Corp.
99.9(c) Form of Expense Deferral Agreement between the Trust and
Undiscovered Managers relating to 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.
99.9(d) Form of Amended and Restated Expense Deferral Agreement
between the Trust and Undiscovered Managers relating to the
Behavioral Growth Fund, the Small Cap Value Fund, the Hidden
Value Fund, the Core Equity Fund and the All Cap Value Fund.
99.10(b) Form of 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.
99.11 Consent of Independent Auditors.
99.16 Computations of Performance Data.
99.17 Financial Data Schedules.
</TABLE>
EXHIBIT 99.8(b)
---------------
FORM OF CUSTODY AGREEMENT BETWEEN THE TRUST AND CUSTODIAL TRUST
COMPANY RELATING TO THE BEHAVIORAL LONG/SHORT FUND.
<PAGE>
CUSTODY AGREEMENT
AGREEMENT, dated as of November __, 1998 by and between UNDISCOVERED
MANAGERS FUNDS (the "Trust"), a business trust organized and existing under the
laws of the Commonwealth of Massachusetts, acting with respect to and on behalf
of Undiscovered Managers Behavioral Long/Short Fund and each of the other series
of the Trust that are identified on Exhibit A hereto (each, a "Portfolio"), and
CUSTODIAL TRUST COMPANY, a bank organized and existing under the laws of the
State of New Jersey (the "Custodian").
WHEREAS, the Trust desires that the securities, funds and other assets of
the Portfolios be held and administered by Custodian pursuant to this Agreement;
WHEREAS, each Portfolio is an investment portfolio represented by a series
of Shares included among the shares of beneficial interest issued by the Trust,
an open-end management investment company registered under the 1940 Act;
WHEREAS, Custodian represents that it is a bank having the qualifications
prescribed in the 1940 Act to act as custodian for management investment
companies registered under the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and Custodian hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever used in this Agreement, the following terms, unless the context
otherwise requires, shall mean:
<PAGE>
1.1 "Authorized Person" means any person authorized by resolution of the
Board of Trustees to give Oral Instructions and Written Instructions on behalf
of the Trust and identified, by name or by office, in Exhibit B hereto or any
person designated to do so by an investment adviser of any Portfolio who is
named by the Trust in Exhibit C hereto.
1.2 "Board of Trustees" means the Board of Trustees of the Trust or, when
permitted under the 1940 Act, the Executive Committee thereof, if any.
1.3 "Book-Entry System" means a book-entry system maintained by a Federal
Reserve Bank for securities of the United States government or of agencies or
instrumentalities thereof (including government-sponsored enterprises).
1.4 "Business Day" means any day on which banks in the State of New Jersey
and New York are open for business.
1.5 "Custody Account" means, with respect to a Portfolio, the account in
the name of such Portfolio, which is provided for in Section 3.2 below.
1.6 "Domestic Securities Depository" means The Depository Trust Company and
any other clearing agency registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, which acts as a securities
depository.
1.7 "Eligible Domestic Bank" means a bank as defined in the 1940 Act.
1.8 "Eligible Foreign Custodian" means any banking institution, trust
company or other entity (including any Foreign Securities Depository) organized
under the laws of a country other than the United States which is eligible under
the 1940 Act to act as a custodian for securities and other assets of a
Portfolio held outside the United States.
1.9 "Foreign Custody Manager" has the same meaning as in the 1940 Act.
-2-
<PAGE>
1.10 "Foreign Securities Depository" means a foreign securities depository
or clearing agency as defined in the 1940 Act.
1.11 "Master Repurchase Agreement" means the Master Repurchase Agreement of
even date herewith between the Trust and Bear, Stearns & Co. Inc. as it may from
time to time be amended.
1.12 "Master Securities Loan Agreement" means the Master Securities Loan
Agreement of even date herewith between the Trust and Bear, Stearns Securities
Corp. as it may from time to time be amended.
1.13 "1940 Act" means the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder.
1.14 "Oral Instructions" means instructions orally transmitted to and
accepted by Custodian which are (a) reasonably believed by Custodian to have
been given by an Authorized Person, (b) recorded and kept among the records of
Custodian made in the ordinary course of business, and (c) completed in
accordance with Custodian's requirements from time to time as to content of
instructions and their manner and timeliness of delivery by the Trust.
1.15 "Proper Instructions" means Oral Instructions or Written Instructions.
Proper Instructions may be continuing Written Instructions when deemed
appropriate by the Trust and Custodian.
1.16 "Securities Depository" means any Domestic Securities Depository or
Foreign Securities Depository.
1.17 "Shares" means, with respect to a Portfolio, those shares in a series
or class of beneficial interests of the Trust that represent interests in such
Portfolio.
-3-
<PAGE>
1.18 "Written Instructions" means written communications received by
Custodian that are (a) reasonably believed by Custodian to have been signed or
sent by an Authorized Person, (b) sent or transmitted by letter, facsimile,
central processing unit connection, on-line terminal or magnetic tape, and (c)
completed in accordance with Custodian's requirements from time to time as to
content of instructions and their manner and timeliness of delivery by the
Trust.
ARTICLE II
APPOINTMENT OF CUSTODIAN
------------------------
2.1 Appointment. The Trust hereby appoints Custodian as custodian of all
such securities, funds and other assets of each Portfolio as may be acceptable
to Custodian and from time to time delivered to it by the Trust or others for
the account of such Portfolio.
2.2 Acceptance. Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF SECURITIES, FUNDS AND OTHER ASSETS
---------------------------------------------
3.1 Segregation. All securities and non-cash property of a Portfolio in the
possession of Custodian (other than securities maintained by Custodian with a
sub-custodian appointed pursuant to this Agreement or in a Securities Depository
or Book-Entry System) shall be physically segregated from other such securities
and non-cash property in the possession of Custodian. All cash, securities and
other non-cash property of a Portfolio shall be identified as belonging to such
Portfolio.
3.2 Custody Account. (a) Custodian shall open and maintain in its trust
department a custody account in the name of each Portfolio, subject only to
draft or order of Custodian, in which Custodian shall enter and carry all
securities, funds and other assets of such Portfolio which are delivered to
Custodian and accepted by it.
-4-
<PAGE>
(b) If, with respect to any Portfolio, Custodian at any time fails to
receive any of the documents referred to in Section 3.10(a) below, then, until
such time as it receives such document, it shall not be obligated to receive any
securities into the Custody Account of such Portfolio and shall be entitled to
return to such Portfolio any securities that it is holding in such Custody
Account.
3.3 Securities in Physical Form. Custodian may, but shall not be obligated
to, hold securities that may be held only in physical form.
3.4 Disclosure to Issuers of Securities. Custodian is authorized to
disclose the Trust's and any Portfolio's names and addresses, and the securities
positions in such Portfolio's Custody Account, to the issuers of such securities
when requested by them to do so.
3.5 Employment of Domestic Sub-Custodians. At any time and from time to
time, Custodian in its discretion may appoint and employ, and may also cease to
employ, any Eligible Domestic Bank as sub-custodian to hold securities and other
assets of a Portfolio that are maintained in the United States and to carry out
such other provisions of this Agreement as it may determine, provided, however,
that the employment of any such sub-custodian has been approved by the Trust.
The employment of any such sub-custodian shall be at Custodian's expense and
shall not relieve Custodian of any of its obligations or liabilities under this
Agreement.
3.6 Employment of Foreign Sub-Custodians. (a) At any time and from time to
time, Custodian in its discretion may appoint and employ in accordance with the
1940 Act, and may also cease to employ, (i) any overseas branch of any Eligible
Domestic Bank, or (ii) any Eligible Foreign Custodian selected by the Foreign
Custody Manager, in each case as a foreign sub-custodian for securities and
other assets of a Portfolio that are maintained outside the United States,
provided, however, that the employment of any such overseas branch has been
approved by the Trust and, provided further that, in the case of any such
Eligible Foreign Custodian, the Foreign Custody Manager has approved, in
writing, the agreement (and/or, in the case of a Foreign Securities Depository,
the rules and/or established practices and procedures thereof) pursuant to which
Custodian employs such Eligible Foreign Custodian.
-5-
<PAGE>
(b) Set forth on Exhibit D hereto, with respect to each Portfolio, are the
foreign sub-custodians (including Foreign Securities Depositories) that
Custodian may employ pursuant to Section 3.6(a) above. Exhibit D shall be
revised from time to time as foreign sub-custodians are added or deleted.
(c) If the Trust proposes to have a Portfolio make an investment which is
to be held in a country in which Custodian does not have appropriate
arrangements in place with a foreign sub-custodian selected by the Foreign
Custody Manager, then the Trust shall inform Custodian sufficiently in advance
of such investment to allow Custodian to make such arrangements.
(d) Notwithstanding anything to the contrary in Section 8.1 below,
Custodian shall have no greater liability to any Portfolio or the Trust for the
actions or omissions of any foreign sub-custodian appointed pursuant to this
Agreement than any such foreign sub-custodian has to Custodian, and Custodian
shall not be required to discharge any such liability which may be imposed on it
unless and until such foreign sub-custodian has effectively indemnified
Custodian against it or has otherwise discharged its liability to Custodian in
full.
(e) Upon the request of the Foreign Custody Manager, Custodian shall
furnish to the Foreign Custody Manager information concerning all foreign
sub-custodians employed pursuant to this Agreement which shall be similar in
kind and scope to any such information that may have been furnished to the
Foreign Custody Manager in connection with the initial approval by the Foreign
Custody Manager of the agreements pursuant to which Custodian employs such
foreign sub-custodians or as otherwise required by the 1940 Act.
3.7 Employment of Other Agents. Custodian may employ other suitable agents,
which may include affiliates of Custodian such as Bear, Stearns & Co. Inc.
("Bear Stearns") or Bear, Stearns Securities Corp. ("BS Securities"), both of
which are securities broker-dealers, provided, however, that Custodian shall not
employ (a) BS Securities to hold any collateral pledged by BS Securities under
the Master Securities Loan Agreement or any other securities loan agreement
between the Trust and BS Securities, whether now or hereafter in effect, or (b)
Bear Stearns to hold any securities
-6-
<PAGE>
purchased from Bear Stearns under the Master Repurchase Agreement or any other
repurchase agreement between the Trust and Bear Stearns, whether now or
hereafter in effect. The appointment of any agent pursuant to this Section 3.7
shall not relieve Custodian of any of its obligations or liabilities under this
Agreement.
3.8 Bank Accounts. In its discretion and from time to time Custodian may
open and maintain one or more demand deposit accounts with any Eligible Domestic
Bank (any such accounts to be in the name of Custodian and subject only to its
draft or order), provided, however, that the opening and maintenance of any such
account shall be at Custodian's expense and shall not relieve Custodian of any
of its obligations or liabilities under this Agreement.
3.9 Delivery of Assets to Custodian. Provided they are acceptable to
Custodian, the Trust shall deliver to Custodian the securities, funds and other
assets of each Portfolio, including (a) payments of income, payments of
principal and capital distributions received by such Portfolio with respect to
securities, funds or other assets owned by such Portfolio at any time during the
term of this Agreement, and (b) funds received by such Portfolio for the
issuance, at any time during such term, of Shares of such Portfolio. Custodian
shall not be under any duty or obligation to require the Trust to deliver to it
any securities or other assets owned by a Portfolio and shall have no
responsibility or liability for or on account of securities or other assets not
so delivered.
3.10 Domestic Securities Depositories and Book-Entry Systems. Custodian and
any sub-custodian appointed pursuant to Section 3.5 above may deposit and/or
maintain securities of any Portfolio in a Domestic Securities Depository or in a
Book-Entry System, subject to the following provisions:
(a) Prior to a deposit of securities of a Portfolio in any Domestic
Securities Depository or Trustees, certified Book-Entry System, the Trust shall
deliver to Custodian a resolution of the Board of by an officer of the Trust,
authorizing and instructing Custodian (and any sub-custodian appointed pursuant
to Section 3.5 above) on an on-going basis to deposit in such Domestic
Securities Depository or Book-Entry System all securities eligible for deposit
therein and to make use of such
-7-
<PAGE>
Domestic Securities Depository or Book-Entry System to the extent possible and
practical in connection with the performance of its obligations hereunder (or
under the applicable sub-custody agreement in the case of such sub-custodian),
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
collateral consisting of securities.
(b) Securities of a Portfolio kept in a Book-Entry System or Domestic
Securities Depository shall be kept in an account ("Depository Account") of
Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) in
such Book-Entry System or Domestic Securities Depository which includes only
assets held by Custodian (or such sub-custodian) as a fiduciary, custodian or
otherwise for customers.
(c) The records of Custodian with respect to securities of a Portfolio that
are maintained in a Book-Entry System or Domestic Securities Depository shall at
all times identify such securities as belonging to such Portfolio.
(d) If securities purchased by a Portfolio are to be held in a Book-Entry
System or Domestic Securities Depository, Custodian (or any sub-custodian
appointed pursuant to Section 3.5 above) shall pay for such securities upon (i)
receipt of advice from the Book-Entry System or Domestic Securities Depository
that such securities have been transferred to the Depository Account, and (ii)
the making of an entry on the records of Custodian (or of such sub-custodian) to
reflect such payment and transfer for the account of such Portfolio. If
securities sold by a Portfolio are held in a Book-Entry System or Domestic
Securities Depository, Custodian (or such sub-custodian) shall transfer such
securities upon (A) receipt of advice from the Book-Entry System or Domestic
Securities Depository that payment for such securities has been transferred to
the Depository Account, and (B) the making of an entry on the records of
Custodian (or of such sub-custodian) to reflect such transfer and payment for
the account of such Portfolio.
(e) Custodian shall provide the Trust with copies of any report obtained by
Custodian (or by any sub-custodian appointed pursuant to Section 3.5 above) from
a Book-Entry System or Domestic
-8-
<PAGE>
Securities Depository in which securities of a Portfolio are kept on the
internal accounting controls and procedures for safeguarding securities
deposited in such Book-Entry System or Domestic Securities Depository.
(f) At its election, the Trust shall be subrogated to the rights of
Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) with
respect to any claim against a Book-Entry System or Domestic Securities
Depository or any other person for any loss or damage to a Portfolio arising
from the use of such Book-Entry System or Domestic Securities Depository, if and
to the extent that such Portfolio has not been made whole for any such loss or
damage.
3.11 Relationship With Securities Depositories. No Book-Entry System,
Securities Depository, or other securities depository or clearing agency
(whether foreign or domestic) which it is or may become standard market practice
to use for the comparison and settlement of trades in securities shall be an
agent or sub-contractor of Custodian for purposes of Section 3.7 above or
otherwise.
3.12 Payments from Custody Account. Upon receipt of Proper Instructions
with respect to a Portfolio but subject to its right to foreclose upon and
liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian
shall make payments from the Custody Account of such Portfolio, but only in the
following cases, provided, first, that such payments are in connection with the
clearance and/or custody of securities or other assets, second, that there are
sufficient funds in such Custody Account, whether belonging to such Portfolio or
advanced to it by Custodian in its sole and absolute discretion as set forth in
Section 3.18 below, for Custodian to make such payments, and, third, that after
the making of such payments, such Portfolio would not be in violation of any
margin or other requirements agreed upon pursuant to Section 3.18 below:
(a) For the purchase of securities for such Portfolio but only (i) in the
case of securities (other than options on securities, futures contracts and
options on futures contracts), against the delivery to Custodian (or any
sub-custodian appointed pursuant to this Agreement) of such securities
registered as provided in Section 3.20 below or in proper form for transfer or,
if the purchase of such
-9-
<PAGE>
securities is effected through a Book-Entry System or Domestic Securities
Depository, in accordance with the conditions set forth in Section 3.10 above,
and (ii) in the case of options, futures contracts and options on futures
contracts, against delivery to Custodian (or such sub-custodian) of evidence of
title thereto in favor of such Portfolio, the Custodian, any such sub-custodian,
or any nominee referred to in Section 3.20 below;
(b) In connection with the conversion, exchange or surrender, as set forth
in Section 3.13(f) below, of securities owned by such Portfolio;
(c) For transfer in accordance with the provisions of any agreement among
the Trust, Custodian and a securities broker-dealer, relating to compliance with
rules of The Options Clearing Corporation and of any registered national
securities exchange (or of any similar organization or organizations) regarding
escrow or other arrangements in connection with transactions of such Portfolio;
(d) For transfer in accordance with the provisions of any agreement among
the Trust, Custodian and a futures commission merchant, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any contract
market (or any similar organization or organizations) regarding margin or other
deposits in connection with transactions of such Portfolio;
(e) For the funding of any time deposit (whether certificated or not) or
other interest-bearing account with any banking institution (including
Custodian), provided that Custodian shall receive and retain such certificate,
advice, receipt or other evidence of deposit (if any) as such banking
institution may deliver with respect to any such deposit or account;
(f) For the purchase from a banking or other financial institution of loan
participations, but only if Custodian has in its possession a copy of the
agreement between the Trust and such banking or other financial institution with
respect to the purchase of such loan participations and provided that Custodian
shall receive and retain such participation certificate or other evidence of
participation
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(if any) as such banking or other financial institution may deliver with respect
to any such loan participation;
(g) For the purchase and/or sale of foreign currencies or of options to
purchase and/or sell foreign currencies, for spot or future delivery, for the
account of such Portfolio pursuant to contracts between the Trust and any
banking or other financial institution (including Custodian, any sub-custodian
appointed pursuant to this Agreement and any affiliate of Custodian);
(h) For transfer to a securities broker-dealer as margin for a short sale
of securities for such Portfolio, or as payment in lieu of dividends paid on
securities sold short for such Portfolio;
(i) For the payment as provided in Article IV below of any dividends,
capital gain distributions or other distributions declared on the Shares of such
Portfolio;
(j) For the payment as provided in Article IV below of the redemption price
of the Shares of such Portfolio;
(k) For the payment of any expense or liability incurred by such Portfolio,
including but not limited to the following payments for the account of such
Portfolio: interest, taxes, and administration, investment advisory, accounting,
auditing, transfer agent, custodian, trustee and legal fees, and other operating
expenses of such Portfolio; in all cases, whether or not such expenses are to be
in whole or in part capitalized or treated as deferred expenses; and
(l) For any other proper purpose, but only upon receipt of Proper
Instructions, specifying the amount and purpose of such payment, certifying such
purpose to be a proper purpose of such Portfolio, and naming the person or
persons to whom such payment is to be made.
3.13 Deliveries from Custody Account. Upon receipt of Proper Instructions
with respect to a Portfolio but subject to its right to foreclose upon and
liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian
shall release and deliver securities and other assets from the Custody
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Account of such Portfolio, but only in the following cases, provided, first,
that such deliveries are in connection with the clearance and/or custody of
securities or other assets, second, there are sufficient amounts and types of
securities or other assets in such Custody Account for Custodian to make such
deliveries, and, third, that after the making of such deliveries, such Portfolio
would not be in violation of any margin or other requirements agreed upon
pursuant to Section 3.18 below:
(a) Upon the sale of securities for the account of such Portfolio but,
subject to Section 3.14 below, only against receipt of payment therefor or, if
such sale is effected through a Book-Entry System or Domestic Securities
Depository, in accordance with the provisions of Section 3.10 above;
(b) To an offeror's depository agent in connection with tender or other
similar offers for securities of such Portfolio; provided that, in any such
case, the funds or other consideration for such securities is to be delivered to
Custodian;
(c) To the issuer thereof or its agent when such securities are called,
redeemed or otherwise become payable, provided that in any such case the funds
or other consideration for such securities is to be delivered to Custodian;
(d) To the issuer thereof or its agent for exchange for a different number
of certificates or other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new securities are to be
delivered to Custodian;
(e) To the securities broker through whom securities are being sold for
such Portfolio, for examination in accordance with the "street delivery" custom;
(f) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the issuer of
such securities, or pursuant to provisions for conversion contained in such
securities, or pursuant to any deposit agreement, including surrender or receipt
of underlying securities in connection with the issuance or cancellation
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of depository receipts; provided that, in any such case, the new securities and
funds, if any, are to be delivered to Custodian;
(g) In the case of warrants, rights or similar securities, to the issuer of
such warrants, rights or similar securities, or its agent, upon the exercise
thereof, provided that, in any such case, the new securities and funds, if any,
are to be delivered to Custodian;
(h) To the borrower thereof, or its agent, in connection with any loans of
securities for such Portfolio pursuant to any securities loan agreement entered
into by the Trust, but only against receipt by Custodian of such collateral as
is required under such securities loan agreement;
(i) To any lender, or its agent, as collateral for any borrowings from such
lender by such Portfolio that require a pledge of assets of such Portfolio, but
only against receipt by Custodian of the amounts borrowed;
(j) Pursuant to any authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of such Portfolio or the Trust;
(k) For delivery in accordance with the provisions of any agreement among
the Trust, Custodian and a securities broker- dealer, relating to compliance
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or of any similar organization or organizations)
regarding escrow or other arrangements in connection with transactions of such
Portfolio;
(l) For delivery in accordance with the provisions of any agreement among
the Trust, Custodian, and a futures commission merchant, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any contract
market (or any similar organization or organizations) regarding margin or other
deposits in connection with transactions of such Portfolio;
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(m) For delivery to a securities broker-dealer as margin for a short sale
of securities for such Portfolio;
(n) To the issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter, collectively, "ADRs") for such securities, or
its agent, against a written receipt therefor adequately describing such
securities, provided that such securities are delivered together with
instructions to issue ADRs in the name of Custodian or its nominee and to
deliver such ADRs to Custodian;
(o) In the case of ADRs, to the issuer thereof, or its agent, against a
written receipt therefor adequately describing such ADRs, provided that such
ADRs are delivered together with instructions to deliver the securities
underlying such ADRs to Custodian or an agent of Custodian; or
(p) For any other proper purpose, but only upon receipt of Proper
Instructions, specifying the securities or other assets to be delivered, setting
forth the purpose for which such delivery is to be made, certifying such purpose
to be a proper purpose of such Portfolio, and naming the person or persons to
whom delivery of such securities or other assets is to be made.
3.14 Delivery Prior to Final Payment. When instructed by the Trust to
deliver securities of a Portfolio against payment, Custodian shall be entitled,
but only if in accordance with generally accepted market practice, to deliver
such securities prior to actual receipt of final payment therefor and,
exclusively in the case of securities in physical form, prior to receipt of
payment therefor. In any such case, such Portfolio shall bear the risk that
final payment for such securities may not be made or that such securities may be
returned or otherwise held or disposed of by or through the person to whom they
were delivered, and Custodian shall have no liability for any of the foregoing.
3.15 Credit Prior to Final Payment. In its sole discretion and from time to
time, Custodian may credit the Custody Account of a Portfolio, prior to actual
receipt of final payment thereof, with (a) proceeds from the sale of securities
of such Portfolio which it has been instructed to deliver against payment, (b)
proceeds from the redemption of securities or other assets in such Custody
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Account, and (c) income from securities, funds or other assets in such Custody
Account. Any such credit shall be conditional upon actual receipt by Custodian
of final payment and may be reversed if final payment is not actually received
in full. Custodian may, in its sole discretion and from time to time, permit a
Portfolio to use funds so credited to its Custody Account in anticipation of
actual receipt of final payment. Any funds so used shall constitute an advance
subject to Section 3.18 below.
3.16 Definition of Final Payment. For purposes of this Agreement, "final
payment" means payment in funds which are (or have become) immediately
available, under applicable law are irreversible, and are not subject to any
security interest, levy, lien or other encumbrance.
3.17 Payments and Deliveries Outside the United States. Notwithstanding
anything to the contrary that may be required by Section 3.12 or Section 3.13
above, or elsewhere in this Agreement, in the case of securities and other
assets maintained outside the United States and in the case of payments made
outside the United States, Custodian and any sub-custodian appointed pursuant to
this Agreement may receive and deliver such securities or other assets, and may
make such payments, in accordance with the laws, regulations, customs,
procedures and practices applicable in the relevant local market outside the
United States.
3.18 Clearing Credit. Custodian may, in its sole discretion and from time
to time, advance funds to the Trust to facilitate the settlement of a
Portfolio's transactions in the Custody Account of such Portfolio. Any such
advance (a) shall be repayable immediately upon demand made by Custodian, (b)
shall be fully secured as provided in Section 9.3 below, and (c) shall bear
interest at such rate, and be subject to such other terms and conditions, as
Custodian and the Trust may agree.
3.19 Actions Not Requiring Proper Instructions. Unless otherwise instructed
by the Trust, Custodian shall with respect to all securities and other assets
held for a Portfolio:
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(a) Subject to Section 8.4 below, receive into the Custody Account of such
Portfolio any funds or other property, including payments of principal, interest
and dividends, due and payable on or on account of such securities and other
assets;
(b) Deliver securities of such Portfolio to the issuers of such securities
or their agents for the transfer thereof into the name of such Portfolio,
Custodian or any of the nominees referred to in Section 3.20 below;
(c) Endorse for collection, in the name of such Portfolio, checks, drafts
and other negotiable instruments;
(d) Surrender interim receipts or securities in temporary form for
securities in definitive form;
(e) Execute, as custodian, any necessary declarations or certificates of
ownership under the federal income tax laws of the United States, or the laws or
regulations of any other taxing authority, in connection with the transfer of
such securities or other assets or the receipt of income or other payments with
respect thereto;
(f) Receive and hold for such Portfolio all rights and similar securities
issued with respect to securities or other assets of such Portfolio;
(g) As may be required in the execution of Proper Instructions, transfer
funds from the Custody Account of such Portfolio to any demand deposit account
maintained by Custodian pursuant to Section 3.8 above; and
(h) In general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase and transfer of, and other dealings
in, such securities and other assets.
3.20 Registration and Transfer of Securities. All securities held for a
Portfolio that are issuable only in bearer form shall be held by Custodian in
that form, provided that any such
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securities shall be held in a Securities Depository or Book-Entry System if
eligible therefor. All other securities and all other assets held for a
Portfolio may be registered in the name of (a) Custodian as agent, (b) any
sub-custodian appointed pursuant to this Agreement, (c) any Securities
Depository, or (d) any nominee or agent of any of them. The Trust shall furnish
to Custodian appropriate instruments to enable Custodian to hold or deliver in
proper form for transfer, or to register as in this Section 3.20 provided, any
securities or other assets delivered to Custodian which are registered in the
name of a Portfolio.
3.21 Records. (a) Custodian shall maintain complete and accurate records
with respect to securities, funds and other assets held for a Portfolio,
including (i) journals or other records of original entry containing an itemized
daily record in detail of all receipts and deliveries of securities and all
receipts and disbursements of funds; (ii) ledgers (or other records) reflecting
(A) securities in transfer, if any, (B) securities in physical possession, (C)
monies and securities borrowed and monies and securities loaned (together with a
record of the collateral therefor and substitutions of such collateral), (D)
dividends and interest received, and (E) dividends receivable and interest
accrued; and (iii) cancelled checks and bank records related thereto. Custodian
shall keep such other books and records with respect to securities, funds and
other assets of a Portfolio which are held hereunder as the Trust may reasonably
request.
(b) All such books and records maintained by Custodian for a Portfolio
shall (i) be maintained in a form acceptable to the Trust and in compliance with
rules and regulations of the Securities and Exchange Commission, (ii) be the
property of such Portfolio and at all times during the regular business hours of
Custodian be made available upon request for inspection by duly authorized
officers, employees or agents of the Trust and employees or agents of the
Securities and Exchange Commission, and (iii) if required to be maintained under
the 1940 Act, be preserved for the periods prescribed therein.
3.22 Account Reports by Custodian. Custodian shall furnish the Trust with a
daily activity statement, including a summary of all transfers to or from the
Custody Account of each Portfolio (in the case of securities and other assets
maintained in the United States, on the day following such
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transfers). At least monthly and from time to time, Custodian shall furnish the
Trust with a detailed statement of the securities, funds and other assets held
for each Portfolio under this Agreement.
3.23 Other Reports by Custodian. Custodian shall provide the Trust with
such reports as the Trust may reasonably request from time to time on the
internal accounting controls and procedures for safeguarding securities which
are employed by Custodian or any sub-custodian appointed pursuant to this
Agreement.
3.24 Proxies and Other Materials. (a) Unless otherwise instructed by the
Trust, Custodian shall promptly deliver to the Trust all notices of meetings,
proxy materials (other than proxies) and other announcements, which it receives
regarding securities held by it in the Custody Account of a Portfolio. Whenever
Custodian or any of its agents receives a proxy with respect to securities in
the Custody Account of a Portfolio, Custodian shall promptly request
instructions from the Trust on how such securities are to be voted, and shall
give such proxy, or cause it to be given, in accordance with such instructions.
If the Trust timely informs Custodian that the Trust wishes to vote any such
securities in person, Custodian shall promptly seek to have a legal proxy
covering such securities issued to the Trust. Unless otherwise instructed by the
Trust, neither Custodian nor any of its agents shall exercise any voting rights
with respect to securities held hereunder.
(b) Unless otherwise instructed by the Trust, Custodian shall promptly
transmit to the Trust all other written information received by Custodian from
issuers of securities held in the Custody Account of any Portfolio. With respect
to tender or exchange offers for such securities or with respect to other
corporate transactions involving such securities, Custodian shall promptly
transmit to the Trust all written information received by Custodian from the
issuers of such securities or from any party (or its agents) making any such
tender or exchange offer or participating in such other corporate transaction.
If the Trust, with respect to such tender or exchange offer or other corporate
transaction, desires to take any action that may be taken by it pursuant to the
terms of such offer or other transaction, the Trust shall notify Custodian (i)
in the case of securities maintained outside the United States, such number of
Business Days prior to the date on which Custodian is to take such action as
will allow Custodian to take such action in the relevant local market for such
securities in
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a timely fashion, and (ii) in the case of all other securities, at least five
Business Days prior to the date on which Custodian is to take such action.
3.25 Co-operation. Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Trust to keep the books
of account of a Portfolio and/or to compute the value of the assets of a
Portfolio.
ARTICLE IV
REDEMPTION OF PORTFOLIO SHARES;
-------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS
---------------------------------
4.1 Transfer of Funds. From such funds as may be available for the purpose
in the Custody Account of a Portfolio, and upon receipt of Proper Instructions
specifying that the funds are required to redeem Shares of such Portfolio or to
pay dividends or other distributions to holders of Shares of such Portfolio,
Custodian shall transfer each amount specified in such Proper Instructions to
such account of such Portfolio or of an agent thereof (other than Custodian), at
such bank, as the Trust may designate therein with respect to such amount.
4.2 Sole Duty of Custodian. Custodian's sole obligation with respect to the
redemption of Shares of a Portfolio and the payment of dividends and other
distributions thereon shall be its obligation set forth in Section 4.1 above,
and Custodian shall not be required to make any payments to the various holders
from time to time of Shares of a Portfolio nor shall Custodian be responsible
for the payment or distribution by the Trust, or any agent designated in Proper
Instructions given pursuant to Section 4.1 above, of any amount paid by
Custodian to the account of the Trust or such agent in accordance with such
Proper Instructions.
ARTICLE V
SEGREGATED ACCOUNTS
-------------------
Upon receipt of Proper Instructions to do so, Custodian shall establish and
maintain a segregated account or accounts for and on behalf of any Portfolio,
into which account or accounts
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may be transferred funds and/or securities, including securities maintained in a
Securities Depository:
(a) in accordance with the provisions of any agreement among the Trust,
Custodian and a securities broker-dealer (or any futures commission merchant),
relating to compliance with the rules of The Options Clearing Corporation or of
any registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions of such Portfolio,
(b) for purposes of segregating funds or securities in connection with
securities options purchased or written by such Portfolio or in connection with
financial futures contracts (or options thereon) purchased or sold by such
Portfolio,
(c) which constitute collateral for loans of securities made by such
Portfolio,
(d) for purposes of compliance by such Portfolio with requirements under
the 1940 Act for the maintenance of segregated accounts by registered management
investment companies in connection with reverse repurchase agreements,
when-issued, delayed delivery and firm commitment transactions, and short sales
of securities, and
(e) for other proper purposes, but only upon receipt of Proper
Instructions, specifying the purpose or purposes of such segregated account and
certifying such purposes to be proper purposes of such Portfolio.
ARTICLE VI
CERTAIN REPURCHASE TRANSACTIONS
-------------------------------
6.1 Transactions. If and to the extent that the necessary funds and
securities of a Portfolio have been entrusted to it under this Agreement, and
subject to Custodian's right to foreclose upon
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and liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian,
as agent of such Portfolio, shall from time to time (and unless the Trust gives
it Proper Instructions to do otherwise) make from the Custody Account of such
Portfolio the transfers of funds and deliveries of securities which such
Portfolio is required to make pursuant to the Master Repurchase Agreement and
shall receive for the Custody Account of such Portfolio the transfers of funds
and deliveries of securities which the seller under the Master Repurchase
Agreement is required to make pursuant thereto. Custodian shall make and receive
all such transfers and deliveries pursuant to, and subject to the terms and
conditions of, the Master Repurchase Agreement.
6.2 Collateral. Custodian shall daily mark to market the securities
purchased under the Master Repurchase Agreement and held in the Custody Account
of a Portfolio, and shall give to the seller thereunder any such notice as may
be required thereby in connection with such mark-to-market.
6.3 Events of Default. Custodian shall promptly notify the Trust of any
event of default under the Master Repurchase Agreement (as such term "event of
default" is defined therein) of which it has actual knowledge.
6.4 Master Repurchase Agreement. Custodian hereby acknowledges its receipt
from the Trust of a copy of the Master Repurchase Agreement. The Trust shall
provide Custodian, prior to the effectiveness thereof, with a copy of any
amendment to the Master Repurchase Agreement.
ARTICLE VII
CERTAIN SECURITIES LENDING TRANSACTIONS
---------------------------------------
7.1 Transactions. If and to the extent that the necessary funds and
securities of a Portfolio have been entrusted to it under this Agreement, and
subject to Custodian's right to foreclose upon and liquidate collateral pledged
to it pursuant to Section 9.3 below, Custodian, as agent of such Portfolio,
shall from time to time (and unless the Trust gives it Proper Instructions to do
otherwise) make from the Custody Account of such Portfolio the transfers of
funds and deliveries of securities
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which such Portfolio is required to make pursuant to the Master Securities Loan
Agreement and shall receive for the Custody Account of such Portfolio the
transfers of funds and deliveries of securities which the borrower under the
Master Securities Loan Agreement is required to make pursuant thereto. Custodian
shall make and receive all such transfers and deliveries pursuant to, and
subject to the terms and conditions of, the Master Securities Loan Agreement.
7.2 Collateral. Custodian shall daily mark to market, in the manner
provided for in the Master Securities Loan Agreement, all loans of securities
which may from time to time be outstanding thereunder.
7.3 Defaults. Custodian shall promptly notify the Trust of any default
under the Master Securities Loan Agreement (as such term "default" is defined
therein) of which it has actual knowledge.
7.4 Master Securities Loan Agreement. Custodian hereby acknowledges its
receipt from the Trust of a copy of the Master Securities Loan Agreement. The
Trust shall provide Custodian, prior to the effectiveness thereof, with a copy
of any amendment to the Master Securities Loan Agreement.
ARTICLE VIII
CONCERNING THE CUSTODIAN
------------------------
8.1 Standard of Care. Custodian shall be held to the exercise of reasonable
care in carrying out its obligations under this Agreement, and shall be without
liability to any Portfolio or the Trust for any loss, damage, cost, expense
(including attorneys' fees and disbursements), liability or claim which does not
arise from willful misfeasance, bad faith or negligence on the part of
Custodian. Custodian shall be entitled to rely on and may act upon advice of
counsel in all matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. In no event shall Custodian be liable
for special, incidental or consequential damages, even if Custodian has
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been advised of the possibility of such damages, or be liable in any manner
whatsoever for any action taken or omitted upon instructions from the Trust or
any agent of the Trust.
8.2 Actual Collection Required. Custodian shall not be liable for, or
considered to be the custodian of, any funds belonging to a Portfolio or any
money represented by a check, draft or other instrument for the payment of
money, until Custodian or its agents actually receive such funds or collect on
such instrument.
8.3 No Responsibility for Title, etc. So long as and to the extent that it
is in the exercise of reasonable care, Custodian shall not be responsible for
the title, validity or genuineness of any assets or evidence of title thereto
received or delivered by it or its agents.
8.4 Limitation on Duty to Collect. Custodian shall promptly notify the
Trust whenever any money or property due and payable from or on account of any
securities or other assets held hereunder for a Portfolio is not timely received
by it. Custodian shall not, however, be required to enforce collection, by legal
means or otherwise, of any such money or other property not paid when due, but
shall receive the proceeds of such collections as may be effected by it or its
agents in the ordinary course of Custodian's custody and safekeeping business or
of the custody and safekeeping business of such agents.
8.5 Express Duties Only. Custodian shall have no duties or obligations
whatsoever except such duties and obligations as are specifically set forth in
this Agreement, and no covenant or obligation shall be implied in this Agreement
against Custodian. Custodian shall have no discretion whatsoever with respect to
the management, disposition or investment of the Custody Account of any
Portfolio and is not a fiduciary to any Portfolio or the Trust. In particular,
Custodian shall not be under any obligation at any time to monitor or to take
any other action with respect to compliance by any Portfolio or the Trust with
the 1940 Act, the provisions of the Trust's trust instruments or by-laws, or
any Portfolio's investment objectives, policies and limitations as in effect
from time to time.
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ARTICLE IX
INDEMNIFICATION
---------------
9.1 Indemnification. Each Portfolio shall indemnify and hold harmless
Custodian, any sub-custodian appointed pursuant to this Agreement and any
nominee of any of them, from and against any loss, damages, cost, expense
(including attorneys' fees and disbursements), liability (including, without
limitation, liability arising under the Securities Act of 1933, the Securities
Exchange Act of 1934, the 1940 Act, and any federal, state or foreign securities
and/or banking laws) or claim arising directly or indirectly (a) from the fact
that securities or other assets in the Custody Account of such Portfolio are
registered in the name of any such nominee, or (b) from any action or inaction,
with respect to such Portfolio, by Custodian or such sub-custodian or nominee
(i) at the request or direction of or in reliance on the advice of the Trust or
any of its agents, or (ii) upon Proper Instructions, or (c) generally, from the
performance of its obligations under this Agreement with respect to such
Portfolio, provided that Custodian, any such sub-custodian or any nominee of any
of them shall not be indemnified and held harmless from and against any such
loss, damage, cost, expense, liability or claim arising from willful
misfeasance, bad faith or negligence on the part of Custodian or any such
sub-custodian or nominee.
9.2 Indemnity to be Provided. If the Trust requests Custodian to take any
action with respect to securities or other assets of a Portfolio, which may, in
the opinion of Custodian, result in Custodian or its nominee becoming liable for
the payment of money or incurring liability of some other form, Custodian shall
not be required to take such action until such Portfolio shall have provided
indemnity therefor to Custodian in an amount and form satisfactory to Custodian.
9.3 Security. As security for the payment of any present or future
obligation or liability of any kind which a Portfolio may have to Custodian with
respect to or in connection with the Custody Account of such Portfolio or this
Agreement, or which such Portfolio may otherwise have to Custodian, the Trust
hereby pledges to Custodian all securities, funds and other assets of every kind
which are in such Custody Account or otherwise held for such Portfolio pursuant
to this Agreement, and hereby grants to Custodian a lien, right of set-off and
continuing security interest in such securities, funds and other assets.
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ARTICLE X
FORCE MAJEURE
-------------
Custodian shall not be liable for any failure or delay in performance of
its obligations under this Agreement arising out of or caused, directly or
indirectly, by circumstances beyond its reasonable control, including, without
limitation, acts of God; earthquakes; fires; floods; wars; civil or military
disturbances; sabotage; strikes; epidemics; riots; power failures; computer
failure and any such circumstances beyond its reasonable control as may cause
interruption, loss or malfunction of utility, transportation, computer (hardware
or software) or telephone communication service; accidents; labor disputes; acts
of civil or military authority; actions by any governmental authority, de jure
or de facto; or inability to obtain labor, material, equipment or
transportation.
ARTICLE XI
REPRESENTATIONS AND WARRANTIES
------------------------------
11.1 Representations With Respect to Portfolios. The Trust represents and
warrants that (a) it has all necessary power and authority to perform the
obligations hereunder of each Portfolio, (b) the execution and delivery by it of
this Agreement, and the performance by it of the obligations hereunder of each
Portfolio, have been duly authorized by all necessary action and will not
violate any law, regulation, charter, by-law, or other instrument, restriction
or provision applicable to it or such Portfolio or by which it or such
Portfolio, or their respective assets, may be bound, and (c) this Agreement
constitutes a legal, valid and binding obligation of each Portfolio, enforceable
against it in accordance with its terms.
11.2 Representations of Custodian. Custodian represents and warrants that
(a) it has all necessary power and authority to perform its obligations
hereunder, (b) the execution and delivery by it of this Agreement, and the
performance by it of its obligations hereunder, have been duly authorized by all
necessary action and will not violate any law, regulation, charter, by-law, or
other instrument, restriction or provision applicable to it or by which it or
its assets may be bound, and (c) this Agreement constitutes a legal, valid and
binding obligation of it, enforceable against it in accordance with its terms.
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ARTICLE XII
COMPENSATION OF CUSTODIAN
-------------------------
Each Portfolio shall pay Custodian such fees and charges as are set forth
in Exhibit E hereto, as such Exhibit E may from time to time be revised by
Custodian upon 14 days' prior written notice to the Trust. Any annual fee or
other charges payable by a Portfolio shall be paid monthly by automatic
deduction from funds available therefor in the Custody Account of such
Portfolio, or, if there are no such funds, upon presentation of an invoice
therefor. Out-of-pocket expenses incurred by Custodian in the performance of its
services hereunder for any Portfolio and all other proper charges and
disbursements of the Custody Account of such Portfolio shall be charged to such
Custody Account by Custodian and paid in the same manner as the annual fee and
other charges referred to in this Article XII.
ARTICLE XIII
TAXES
-----
13.1 Taxes Payable by Portfolios. Any and all taxes, including any interest
and penalties with respect thereto, which may be levied or assessed under
present or future laws or in respect of the Custody Account of any Portfolio or
any income thereof shall be charged to such Custody Account by Custodian and
paid in the same manner as the annual fee and other charges referred to in
Article XII above.
13.2 Tax Reclaims. Upon the written request of the Trust, Custodian shall
exercise, on behalf of any Portfolio, any tax reclaim rights of such Portfolio
which arise in connection with foreign securities in the Custody Account of such
Portfolio.
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<PAGE>
ARTICLE XIV
AUTHORIZED PERSONS; NOTICES
---------------------------
14.1 Authorized Persons. Custodian may rely upon and act in accordance with
any notice, confirmation, instruction or other communication which is reasonably
believed by Custodian to have been given or signed on behalf of the Trust by one
of the Authorized Persons designated by the Trust in Exhibit B hereto, as it may
from time to time be revised. The Trust may revise Exhibit B hereto at any time
by notice in writing to Custodian given in accordance with Section 14.4 below,
but no revision of Exhibit B hereto shall be effective until Custodian actually
receives such notice.
14.2 Investment Advisers. Custodian may also rely upon and act in
accordance with any Written or Oral Instructions given with respect to a
Portfolio which are reasonably believed by Custodian to have been given or
signed by one of the persons designated from time to time by any of the
investment advisers of such Portfolio who are specified in Exhibit C hereto (if
any) as it may from time to time be revised. The Trust may revise Exhibit C
hereto at any time by notice in writing to Custodian given in accordance with
Section 14.4 below, and each investment adviser specified in Exhibit C hereto
(if any) may at any time by like notice designate an Authorized Person or remove
an Authorized Person previously designated by it, but no revision of Exhibit C
hereto (if any) and no designation or removal by such investment adviser shall
be effective until Custodian actually receives such notice.
14.3 Oral Instructions. Custodian may rely upon and act in accordance with
Oral Instructions. All Oral Instructions shall be confirmed to Custodian in
Written Instructions. However, if Written Instructions confirming Oral
Instructions are not received by Custodian prior to a transaction, it shall in
no way affect the validity of the transaction authorized by such Oral
Instructions or the authorization given by an Authorized Person to effect such
transaction. Custodian shall incur no liability to any Portfolio or the Trust in
acting upon Oral Instructions. To the extent such Oral Instructions vary from
any confirming Written Instructions, Custodian shall advise the Trust of such
variance but unless confirming Written Instructions are timely received, such
Oral Instructions shall govern.
-27-
<PAGE>
14.4 Addresses for Notices. Unless otherwise specified herein, all demands,
notices, instructions, and other communications to be given hereunder shall be
sent, delivered or given to the recipient at the address, or the relevant
telephone number, set forth after its name hereinbelow:
If to the Trust:
UNDISCOVERED MANAGERS FUNDS for UNDISCOVERED MANAGERS
BEHAVIORAL LONG/SHORT FUND
c/o RJF Asset Management, Inc.
Attention: Fred Stanske
Telephone: ( ) -
Facsimile: ( ) -
If to Custodian:
CUSTODIAL TRUST COMPANY
101 Carnegie Center
Princeton, New Jersey 08540-6231
Attention: Vice President - Trust Operations
Telephone: (609) 951-2320
Facsimile: (609) 951-2327
or at such other address as either party hereto shall have provided to the other
by notice given in accordance with this Section 14.4. Writing shall include
transmissions by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
14.5 Remote Clearance. Written Instructions for the receipt, delivery or
transfer of securities may include, and Custodian shall accept, Remote Clearance
Instructions (as defined hereinbelow) and Bulk Input Instructions (as defined
hereinbelow), provided that such Instructions are given in accordance with the
procedures prescribed by Custodian from time to time as to content of
instructions and their manner and timeliness of delivery by Customer. Custodian
shall be entitled to conclusively assume that all Remote Clearance Instructions
and Bulk Input Instructions have been given by an Authorized Person, and
Custodian is hereby irrevocably authorized to act in accordance therewith. For
purposes of this Agreement, "Remote Clearance Instructions" means instructions
that are input directly via a remote terminal which is located on the premises
of the Trust, or of an investment adviser named in Exhibit C hereto, and linked
to Custodian; and "Bulk Input Instructions" means instructions that are input by
bulk input computer tape delivered to Custodian by messenger or transmitted to
it via such transmission mechanism as the Trust and Custodian shall from time to
time agree upon.
-28-
<PAGE>
ARTICLE XV
TERMINATION
-----------
Either party hereto may terminate this Agreement with respect to one or
more of the Portfolios by giving to the other party a notice in writing
specifying the date of such termination, which shall be not less than sixty (60)
days after the date of the giving of such notice. Upon the date set forth in
such notice this Agreement shall terminate with respect to each Portfolio
specified in such notice, and Custodian shall, upon receipt of a notice of
acceptance by the successor custodian, on that date (a) deliver directly to the
successor custodian or its agents all securities (other than securities held in
a Book-Entry System or Securities Depository) and other assets then owned by
such Portfolio and held by Custodian as custodian, and (b) transfer any
securities held in a Book-Entry System or Securities Depository to an account of
or for the benefit of such Portfolio, provided that such Portfolio shall have
paid to Custodian all fees, expenses and other amounts to the payment or
reimbursement of which it shall then be entitled.
ARTICLE XVI
LIMITATION OF LIABILITIES
-------------------------
To the extent that the trustees of the Trust are regarded as entering into
this Agreement, they do so only as trustees of the Trust and not individually.
The obligations under this Agreement of the Trust or any Portfolio shall not be
binding upon any trustee, officer or employee of the Trust individually, or upon
any holder of Shares individually, but shall be binding only upon the assets and
property of such Portfolio. Such trustees, officers, employees and holders, when
acting in such capacities, shall not be personally liable under this Agreement,
and Custodian shall look solely to the assets and property of each Portfolio for
the performance of this Agreement with respect to such Portfolio and the payment
of any claim against such Portfolio under this Agreement.
-29-
<PAGE>
ARTICLE XVII
MISCELLANEOUS
-------------
17.1 Business Days. Nothing contained in this Agreement shall require
Custodian to perform any function or duty on a day other than a Business Day.
17.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
conflict of law principles thereof.
17.3 References to Custodian. The Trust shall not circulate any printed
matter which contains any reference to Custodian without the prior written
approval of Custodian, excepting printed matter contained in the prospectus or
statement of additional information for a Portfolio and such other printed
matter as merely identifies Custodian as custodian for a Portfolio. The Trust
shall submit printed matter requiring approval to Custodian in draft form,
allowing sufficient time for review by Custodian and its counsel prior to any
deadline for printing.
17.4 No Waiver. No failure by either party hereto to exercise, and no delay
by such party in exercising, any right hereunder shall operate as a waiver
thereof. The exercise by either party hereto of any right hereunder shall not
preclude the exercise of any other right, and the remedies provided herein are
cumulative and not exclusive of any remedies provided at law or in equity.
17.5 Amendments. This Agreement cannot be changed orally and, except as
otherwise provided herein with respect to the Exhibits attached hereto, no
amendment to this Agreement shall be effective unless evidenced by an instrument
in writing executed by the parties hereto.
17.6 Counterparts. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts, each of which
shall be deemed an original but all of which together shall constitute but one
and the same instrument.
-30-
<PAGE>
17.7 Severability. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired thereby.
17.8 Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that this Agreement shall not be assignable by
either party hereto without the written consent of the other party. Any
purported assignment in violation of this Section 17.8 shall be void.
17.9 Jurisdiction. Any suit, action or proceeding with respect to this
Agreement may be brought in the Supreme Court of the State of New York, County
of New York, or in the United States District Court for the Southern District of
New York, and the parties hereto hereby submit to the non-exclusive jurisdiction
of such courts for the purpose of any such suit, action or proceeding, and
hereby waive for such purpose any other preferential jurisdiction by reason of
their present or future domicile or otherwise.
17.10 Headings. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or construction
of any provision of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its representative thereunto duly
authorized, all as of the day and year first above written.
UNDISCOVERED MANAGERS FUNDS CUSTODIAL TRUST COMPANY
on behalf of UNDISCOVERED MANAGERS
BEHAVIORAL LONG/SHORT FUND
By: ____________________ By: _____________________
Name: Name:
Title: Title:
-31-
<PAGE>
EXHIBIT A
PORTFOLIOS
----------
Undiscovered Managers Funds - Undiscovered Managers Behavioral Long/Short Fund
-32-
<PAGE>
EXHIBIT B
AUTHORIZED PERSONS
------------------
Set forth below are the names and specimen signatures of the persons
authorized by the Trust to administer the Custody Accounts of the Portfolios.
Name Signature
___________________________________ ___________________________________
___________________________________ ___________________________________
-33-
<PAGE>
EXHIBIT C
INVESTMENT ADVISERS
-------------------
RJF Asset Management, Inc. (Undiscovered Managers Funds - Undiscovered Managers
Behavioral Long/Short Fund)
-34-
<PAGE>
EXHIBIT D
APPROVED FOREIGN SUB-CUSTODIANS AND SECURITIES DEPOSITORIES
-----------------------------------------------------------
Undiscovered Managers Funds - Undiscovered Managers Behavioral Long/Short
Fund
Foreign Sub-custodian Country(ies) Securities Depositories
- --------------------- ------------ -----------------------
-35-
<PAGE>
EXHIBIT E
CUSTODY FEES AND TRANSACTION CHARGES
------------------------------------
(UNDISCOVERED MANAGERS BEHAVIORAL LONG/SHORT FUND)
Domestic Fees. Assets maintained by the Custodian in the Custody Account of
Undiscovered Managers Behavioral Long/Short Fund (the "Behavioral Long/Short
Fund") in the United States are hereinafter referred to as "Domestic Assets".
For purposes of calculating the annual fee hereinafter provided for and charging
the transaction fees hereinafter provided for, all Domestic Assets held in the
account established pursuant to the Special Custody Agreement among the Trust,
the Custodian and Bear, Stearns Securities Corp., dated as of November __, 1998.
shall be deemed to be held in the Custody Account of the Behavioral Long/Short
Fund under this Agreement, and all transactions in such Domestic Assets shall be
deemed to have occurred in such Custody Account.
The Behavioral Long/Short Fund shall pay Custodian the following fees for
Domestic Assets and the following charges for transactions in the United States,
all such fees and charges to be payable monthly:
(1) an annual fee consisting of the total of 0.04% (4 basis points) per
annum of the value of the first $50 million of Domestic Assets in the Custody
Account of such Portfolio, 0.02% (2 basis points) per annum of the next $150
million of such assets and 0.01% (1 basis point) per annum of the amount of such
assets in excess of $200 million;
(2) a transaction charge of $15 for each receive or deliver of book-entry
securities into or from the Custody Account of such Portfolio (but not for any
such receive or deliver in a repurchase transaction representing a cash sweep
investment for such Portfolio's account);
(3) a transaction charge of $25 for each receive or deliver into or from
such Portfolio's Custody Account of securities in physical form;
-36-
<PAGE>
(4) a transaction charge for each repurchase transaction in the Custody
Account of such Portfolio which represents a cash sweep investment for such
Portfolio's account, computed at a rate of 0.10% (ten basis points) per annum on
the amount of the purchase price paid by such Portfolio in such repurchase
transaction;
(5) a charge of $10 for each "free" transfer of funds from the Custody
Account of such Portfolio; and
(6) a service charge for each holding of securities or other assets of such
Portfolio that are sold by way of private placement or in such other manner as
to require services by Custodian which in its reasonable judgment are materially
in excess of those ordinarily required for the holding of publicly traded
securities in the United States.
International Fees. Each Portfolio shall pay Custodian fees for assets
maintained by such Portfolio outside the United States ("Foreign Assets") and
charges for transactions by such Portfolio outside the United States (including,
without limitation, charges for funds transfers and tax reclaims) in accordance
with such schedule of fees and charges for each country in which Foreign Assets
of such Portfolio are held as Custodian shall from time to time provide to the
Trust. Any asset-based fee shall be based upon the total market value of the
applicable Foreign Assets as determined on the last Business Day of the month
for which such fee is charged.
-37-
EXHIBIT 99.8(c)
---------------
FORM OF SPECIAL CUSTODY ACCOUNT AGREEMENT BY AND AMONG THE TRUST,
CUSTODIAL TRUST COMPANY AND BEAR, STEARNS SECURITIES CORP.
<PAGE>
SPECIAL CUSTODY ACCOUNT AGREEMENT
(Short Sales)
AGREEMENT (the "Agreement") dated as of December __, 1998, by and among
Custodial Trust Company in its capacity as custodian hereunder (the "Bank"),
Undiscovered Managers Funds on behalf of its Behavioral Long/Short Fund (the
"Customer"), and Bear, Stearns Securities Corp. (the "Broker").
WHEREAS, Broker is a securities broker-dealer and is a member of several
national securities exchanges; and
WHEREAS, Customer is a registered investment company which desires from
time to time to execute various securities transactions, including short sales
(which are permitted by Customer's investment policies), and in connection
therewith has executed Broker's Professional Account Agreement (the "Customer
Agreement") which provides for margin transactions; and
WHEREAS, to facilitate Customer's transactions in short sales of
securities, Customer and Broker desire to establish procedures for the
compliance by Broker with the provisions of Regulation T of the Board of
Governors of the Federal Reserve System and other applicable requirements (the
"Margin Rules"); and
WHEREAS, to assist Broker and Customer in complying with the Margin Rules,
Bank is prepared to act as custodian to hold Collateral (as defined herein);
NOW THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS
-----------
As used herein, the following terms shall have the following meanings:
(a) "Adequate Margin" in respect of short sales shall mean such collateral
as is adequate in Broker's reasonable judgment under the Margin Rules
and the internal policies of Broker.
(b) "Advice from Broker" or "Advice" shall mean a written notice sent to
Customer and Bank by facsimile, except that an Advice for initial or
additional Collateral or with respect to Broker's ability to effect a
short sale for Customer may be given orally. With respect to any short
sale or Closing Transaction, the Advice from Broker shall mean a
standard confirmation in use by Broker for such purpose and sent to
Customer and Bank by facsimile. With respect to substitutions or
releases of Collateral, Advice from Broker shall mean a written notice
signed by Broker and sent to Customer and Bank by facsimile. An
authorized agent of Broker will certify to Customer and Bank the names
and signatures of those employees who are
<PAGE>
authorized to sign an Advice from Broker, which certification may be
amended from time to time. When used herein, the term "Advise" shall
mean the act of sending an Advice from Broker.
(c) "Closing Transaction" shall mean a transaction in which securities
which have been sold short are purchased for Customer.
(d) "Collateral" shall mean cash, U.S. government securities or other
securities acceptable to Broker.
(e) "Custody Agreement" shall mean the agreement for general custodial
services between Bank and Customer, dated as of December __, 1998.
(f) "Insolvency" shall mean that (A) an order, judgment or decree has been
entered under the bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or
similar law (herein called the "Bankruptcy law") of any competent
jurisdiction adjudicating Customer insolvent; or (B) Customer has
petitioned or applied to any tribunal for, or consented to the
appointment of, or taking possession by, a trustee, receiver,
liquidator or similar official, of Customer, or commenced a voluntary
case under the Bankruptcy Law of the United States or any proceedings
relating to Customer under the Bankruptcy Law of any other competent
jurisdiction, whether now or hereinafter in effect; or (C) any such
petition or application has been filed, or any such proceedings
commenced, against Customer and Customer by any act has indicated its
approval thereof, consent thereto or acquiescence therein, or an order
for relief has been entered in an involuntary case under the
Bankruptcy Law of the United States, as now or hereinafter
constituted, or an order, judgment or decree has been entered
appointing any such trustee, receiver, liquidator or similar official,
or approving the petition in any such proceedings, and such order,
judgment or decree remains unstayed and in effect for more than 60
days.
(g) "Instruction from Customer" or "Instruction" shall mean a request,
direction or certification in writing signed by Customer and sent to
Bank and Broker by facsimile. An officer of Customer will certify to
Bank and Broker the names and signatures of those persons authorized
to sign an Instruction, which certification may be amended from time
to time. When used herein, the term "Instruct" shall mean the act of
sending an Instruction from Customer.
2. SPECIAL CUSTODY ACCOUNT
-----------------------
(a) Opening Custody Account. Bank shall open an account on its books
entitled "Special Custody Account for Bear, Stearns Securities Corp.
as Pledgee of
2
<PAGE>
Undiscovered Managers Funds on behalf of its Behavioral Long/Short
Fund" (the "Special Custody Account") and shall hold therein all
securities and similar property as shall be received and accepted by
it therein pursuant to this Agreement. Customer agrees to Instruct
Bank as to cash and specific securities which Bank is to identify on
its books and records as pledged to Broker as Collateral in the
Special Custody Account. Customer agrees that the value of the
Collateral shall be at least equal to what Broker shall initially and
from time to time Advise Customer is necessary to constitute Adequate
Margin. The Collateral (i) will be held by Bank for Broker as agent of
Broker, (ii) may be released only in accordance with the terms of this
Agreement, and (iii) except as required to be released hereunder to
Broker, shall not be made available to Broker or any other person
claiming through Broker, including the creditors of Broker.
(b) Security Interest. Customer hereby grants a continuing security
interest to Broker in the Collateral in the Special Custody Account.
To perfect Broker's security interest, Bank will hold the Collateral
in the Special Custody Account, subject to the interest therein of
Broker as the pledgee and secured party thereof in accordance with the
terms of this Agreement. Such security interest will terminate at such
time as Collateral is released as provided herein. Bank shall have no
responsibility for the validity or enforceability of such security
interest.
(c) Confirmation. Bank will confirm in writing to Broker and Customer all
pledges, releases or substitutions of Collateral and will supply
Broker and Customer with a monthly statement of Collateral and
transactions in the Special Custody Account for such month. Bank will
also advise Broker upon request of the kind and amount of Collateral
pledged to Broker.
(d) Excess Collateral. Upon the request of Customer, Broker shall Advise
Bank and Customer of any Collateral in the Special Custody Account in
excess of that which is necessary to constitute Adequate Margin (any
such excess to be referred to hereinafter as "Excess Collateral").
Upon the request of Customer and Bank's receipt of an Advice from
Broker confirming the presence of any Excess Collateral, such Excess
Collateral shall be transferred from the Special Custody Account to an
account of Customer at Bank.
(e) Accounts and Records. Bank will maintain accounts and records for the
Collateral in the Special Custody Account as more fully described in
paragraph 5 hereof. The Collateral shall at all times remain the
property of Customer subject only to the extent of the interest and
rights therein of Broker as the pledgee thereof.
3
<PAGE>
3. ORIGINAL AND VARIATION MARGIN ON SHORT SALES
--------------------------------------------
(a) Short Sales. From time to time, Customer may place with Broker orders
for the short sale of securities. Prior to the acceptance of such
orders, Broker will Advise Customer of Broker's ability to borrow
securities or other property and any acceptance of short sale orders
will be contingent thereon.
(b) Open Short Sales Balance. Broker shall, based on the closing market
price on each business day, compute the aggregate net credit or debit
balance on Customer's open short sales and advise Customer and/or
Customer's designated agent by 11:00 A.M. New York time on the next
business day (each a "Determination Day") of the amount of the net
debit or credit, as the case may be. If a net debit balance exists on
a Determination Day, Customer will cause an amount equal to such net
debit balance to be paid to Broker by the close of business on such
Determination Day. If a net credit balance exists on a Determination
Day, Broker will pay such credit balance to Customer by the close of
business on such Determination Day. As Customer's open short positions
are marked-to-market each business day, payments will be made by or to
Customer to reflect changes (if any) in the credit or debit balances.
To the extent payments are not made as aforesaid, Broker will charge
interest on debit balances and pay interest on credit balances, each
as applicable. Balances will be appropriately adjusted when short
sales are closed out.
4. PLACING ORDERS
--------------
It is understood and agreed that Customer, when placing with Broker any
order for the short sale of securities for Customer's account, will designate
the order as such and hereby authorizes Broker to mark such order as being
"short", and when placing with Broker any order to sell long for Customer's
account, will designate the order as such and hereby authorizes Broker to mark
such order as being "long." Any sell order which Customer shall designate as
being for its long account as aforesaid is for securities then owned by
Customer, and if such securities are not then deliverable by Broker from any
account of Customer, the placing of such order shall constitute a representation
by Customer that it is impracticable for Customer then to deliver such
securities to Broker but that Customer shall deliver them by the settlement date
or as soon as possible thereafter.
4
<PAGE>
5. RIGHTS AND DUTIES OF BANK
-------------------------
(a) Generally. Bank shall receive and hold in the Special Custody Account,
as custodian upon the terms of this Agreement, all Collateral
deposited and maintained pursuant to the terms of this Agreement and,
except as otherwise provided in this Agreement, shall receive and hold
all monies and other property paid, distributed or substituted in
respect of any Collateral or realized on the sale or other disposition
of Collateral; provided, however, that Bank shall have no duty to
require any money or securities to be delivered to it or to determine
that the amount and form of assets delivered to it comply with any
applicable requirements. Collateral held in the Special Custody
Account shall be released only in accordance with this Agreement or as
required by applicable law. Customer grants its authority to deposit
in the Special Custody Account any money, securities and other
property received by Bank. Bank may hold the securities in the Special
Custody Account in bearer, nominee, book entry, or other form and in a
depository or clearing corporation, with or without indicating that
the securities are held hereunder; provided, however, that all
securities held in the Special Custody Account shall be identified on
Bank's records as subject to this Agreement and shall be in a form
that permits transfer without additional authorization or consent of
Customer.
(b) Dividends and Interest. Any interest, dividends or other distributions
paid with respect to Collateral held in the Special Custody Account
shall be retained therein as additional Collateral, subject to the
provision in this Agreement concerning Excess Collateral.
(c) Reports. Bank shall, as promptly as practical, provide Broker and
Customer and/or Customer's designated agent with written confirmation
of each transfer into and out of the Special Custody Account. Bank
also shall render to Broker and Customer and/or Customer's designated
agent a monthly statement of the Collateral held in the Special
Custody Account. In addition, Bank will notify Broker and Customer
and/or Customer's designated agent, upon request of Broker, Customer,
or Customer's designated agent at any time, of the type and amount of
Collateral held in the Special Custody Account; provided, however,
that Bank shall have no responsibility for making any determination as
to the value of such Collateral.
(d) Limitation of Bank's Liability. Bank's duties and responsibilities are
set forth in this Agreement. Bank shall act only upon receipt of an
Advice from Broker regarding the release or substitution of
Collateral. Bank shall not be liable or responsible for anything done,
or omitted to be done by it in good faith and in the absence of
negligence and may rely and shall be protected in acting upon any
notice, instruction or other communication which it reasonably
believes to be genuine and authorized. As between Bank and Broker,
Broker shall indemnify and hold Bank
5
<PAGE>
harmless with regard to any losses or liabilities of Bank (including
counsel fees) imposed on or incurred by Bank arising out of any action
or omission of Bank in accordance with any Advice, notice or
instruction of Broker under this Agreement. In matters concerning or
relating to this Agreement, Bank shall not be responsible for
compliance with any statute or regulation regarding the establishment
or maintenance of margin credit, including but not limited to
Regulations T or X of the Board of Governors of the Federal Reserve
System, or with any rules or regulations of the Office of the
Controller of the Currency (or the Securities and Exchange
Commission). Bank shall not be liable to any party for any acts or
omissions of the other parties to this Agreement.
(e) Compensation. Bank shall be paid as compensation for its services
pursuant to this Agreement such compensation as may from time to time
be agreed upon in writing between Customer and Bank.
6. CLOSING/LIQUIDATING TRANSACTIONS; DELIVERY OF COLLATERAL TO BROKER
------------------------------------------------------------------
In the event of any failure by Customer to comply timely with any
obligation on Customer's part to be performed or observed under this Agreement
or the Customer Agreement, including, but not limited to, the obligation to
maintain Adequate Margin, or in the event of Customer's Insolvency, Broker may
effect a Closing Transaction or buy-in of any securities as to which Customer's
account may be short. In the event of any such failure by Customer to comply or
Customer's Insolvency, Broker shall also have the right to sell any and all
Collateral in the Special Custody Account and, by delivery of an Advice to Bank,
to have the Collateral delivered by Bank to Broker free of payment of money or
value. The aforesaid Advice shall state that, pursuant to this Agreement, the
condition precedent to Broker's right to receive such Collateral free of payment
of money or value has occurred. Bank will provide immediate notice to Customer
by telephone of any receipt by Bank of an Advice from Broker to deliver
Collateral free of payment of money or value, and shall promptly effect delivery
of Collateral to Broker. Such sale or purchase may be made according to Broker's
judgement and may be made at Broker's discretion, on the principal exchange or
other market for such securities, or in the event such principal market is
closed, in a manner commercially reasonable for such securities.
7. LIMITATION OF BROKER LIABILITY TO CUSTOMER
------------------------------------------
Broker shall not be liable to Customer for any losses, costs, damages,
liabilities or expenses suffered or incurred by Customer as a result of any
transaction executed hereunder, or any other action taken or not taken by Broker
hereunder for Customer's account at Customer's direction or otherwise, except to
the extent that such loss, cost, damage, liability or expense is the result of
Broker's own recklessness, willful misconduct or bad faith. Notwithstanding
anything set forth in
6
<PAGE>
this Agreement, Broker shall not be liable for any losses caused directly or
indirectly by any inability of Broker to perform occasioned by suspension of
trading, wars, civil disturbances, strikes, natural calamities, labor or
material shortages, government restrictions, acts or omissions of exchanges,
specialists, markets, clearance organizations or information providers, delays
in mails, delays or inaccuracies in the transmission of orders or information,
governmental, exchange or self-regulatory organization laws, rules or actions,
or any other causes beyond Broker's control, or for any consequential,
incidental, punitive, special or indirect damages, economic loss or lost
profits, even if Broker is advised of the possibility of such damages or loss.
8. REPRESENTATIONS AND WARRANTIES
------------------------------
Customer represents that neither the Collateral nor any portion thereof is,
and warrants that neither the Collateral nor any portion thereof will at any
time be, subject to any right, charge, security interest, lien or claim of any
kind, excluding the security interest granted under this Agreement by Customer
to Broker. Bank represents that neither the Collateral nor any portion thereof
is, and warrants that neither the Collateral nor any portion thereof will at any
time be, subject to any right, charge, security interest, lien or claim of any
kind in favor of Bank or any person claiming through Bank.
9. TERMINATION
-----------
Any of the parties hereto may terminate this Agreement by notice in writing
to the other parties hereto; provided, however, that the status of any short
sales, and of the Collateral held to margin such short sales at the time such
notice is given, shall not be affected by such termination until the release of
such Collateral pursuant to applicable law, regulations or the rules of any self
regulatory organization to which Broker is subject. In the event of any release
of Collateral, the Collateral released shall be transferred to an account of
Customer at Bank.
10. NOTICES
-------
Written communications hereunder shall be sent by facsimile as required
herein, or when the method of delivery is not specified, may be mailed first
class postage prepaid, except that written notice of termination shall be sent
by certified mail, addressed:
(a) if to Bank, to:
Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
Attn:
Phone:
Facsimile:
7
<PAGE>
(b) if to Customer, to:
Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
Attn:
Phone:
Facsimile:
(c) if to Broker, to:
Bear, Stearns Securities Corp.
245 Park Avenue
New York, New York 10167
Attn: Michael Minikes, Treasurer
Phone: (212) 272-2089
Facsimile: (212) 272-3099
11. CONTROLLING LAW
---------------
The construction and enforcement of this Agreement shall be subject to and
governed by the laws of the State of New York.
12. THIS AGREEMENT CONTROLS; MODIFICATION/AMENDMENT
-----------------------------------------------
To the extent there are inconsistencies between this Agreement and the
Custody Agreement, Customer and Bank agree that the terms of this Agreement
shall control with respect thereto. No modification or amendment of this
Agreement shall be effective unless in writing and signed by each party to this
Agreement.
13. COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts and shall
become effective at such time as counterparts executed by all of the parties to
this Agreement have been delivered. Each copy of this Agreement which includes
counterparts executed by each party to this Agreement shall be an original
hereof.
14. CAPTIONS/HEADINGS
The captions and headings preceding the text of each paragraph and
sub-paragraph herein shall be disregarded in connection with the interpretation
of this Agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers as of the date first above written.
UNDISCOVERED MANAGERS FUNDS on
behalf of its Behavioral Long/Short Fund
By: __________________________________
Name:
Title:
CUSTODIAL TRUST COMPANY
By: __________________________________
Name:
Title:
BEAR, STEARNS SECURITIES CORP.
By: __________________________________
Name: Michael Minikes
Title: Treasurer
9
EXHIBIT 99.9(c)
---------------
FORM OF EXPENSE DEFERRAL AGREEMENT BETWEEN THE TRUST AND
UNDISCOVERED MANAGERS RELATING TO 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
<PAGE>
EXPENSE DEFERRAL AGREEMENT
THIS AGREEMENT dated as of December ___, 199__ is made and entered into by
and between UNDISCOVERED MANAGERS FUNDS, a Massachusetts business trust (the
"Trust"), on behalf of its _________ Fund series (the "Series"), and
UNDISCOVERED MANAGERS, LLC, a Delaware limited liability company (the
"Manager").
WHEREAS, the Manager has been appointed the investment adviser of the
Series pursuant to a Management Agreement dated December ___, 199__ between the
Trust and the Manager relating to the Series (the "Management Agreement"); and
WHEREAS, the Trust and the Manager desire to enter into the arrangements
described herein relating to certain expenses of the Series;
NOW, THEREFORE, the Trust and the Manager hereby agree as follows:
1. Until further notice from the Manager to the Trust, the Manager agrees,
subject to Section 2 hereof, to (i) reduce the fees payable to it under the
Management Agreement (but not below zero) and (ii) pay any operating expenses of
the Series, to the extent necessary to limit the operating expenses of the
Series (exclusive of brokerage costs, interest, taxes and extraordinary
expenses) to the annual rate (as a percentage of the average daily net assets of
the Series) of ____ percent.
2. The Series agrees to pay to the Manager (i) the amount of fees that, but
for Section 1 hereof, would have been payable by the Series to the Manager
pursuant to the Management Agreement and (ii) the amount of the operating
expenses of the Series that the Manager paid pursuant to Section 1 hereof
(collectively, "Deferred Fees and Expenses"), subject to the limitations
provided in this Section 2. Such repayment shall be made monthly, but only if
the operating expenses of the Series (exclusive of brokerage costs, interest,
taxes and extraordinary expenses), without regard to such repayment, are at an
annual rate (as a percentage of the average daily net assets of the Series) of
less than ____ percent. Furthermore, the amount of Deferred Fees and Expenses
paid by the Series in any month shall be limited so that the sum of (a) the
amount of such payment and (b) the other operating expenses of the Series
(exclusive of brokerage costs, interest, taxes and extraordinary expenses) do
not exceed the foregoing annual percentage rates.
Deferred Fees and Expenses with respect to any fiscal year of the Trust
shall not be payable by the Series to the extent that the amounts payable by the
Series pursuant to the immediately preceding two sentences during the period
ending two years after the end of such
<PAGE>
fiscal year are not sufficient to pay such Deferred Fees and Expenses. In no
event will the Series be obligated to pay any fees waived or deferred by the
Manager with respect to any other series of the Trust.
3. The Manager may by notice in writing to the Trust terminate, in whole or
in part, its obligation under Section 1 to reduce its fees and bear expenses
with respect to the Series in any period following the date specified in such
notice (or change the percentage specified in Section 1), but no such change
shall affect the obligation (including the amount of the obligation) of the
Series to repay amounts of Deferred Fees and Expenses with respect to periods
prior to the date specified in such notice.
4. A copy of the Agreement and Declaration of Trust establishing the Trust
is on file with the Secretary of The Commonwealth of Massachusetts, and notice
is hereby given that this Agreement is executed with respect to the Series on
behalf of the Trust by an officer of the Trust as an officer and not
individually and that the obligations of or arising out of this Agreement are
not binding upon any of the trustees, officers or shareholders individually but
are binding only upon the assets and property belonging to the Series.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
UNDISCOVERED MANAGERS FUNDS
By ____________________________
Mark P. Hurley, President
UNDISCOVERED MANAGERS, LLC
By ____________________________
Mark P. Hurley, President and CEO
EXHIBIT 99.9(d)
---------------
FORM OF AMENDED AND RESTATED EXPENSE DEFERRAL AGREEMENT
BETWEEN THE TRUST AND UNDISCOVERED MANAGERS RELATING TO THE
BEHAVIORAL GROWTH FUND, THE SMALL CAP VALUE FUND, THE HIDDEN
VALUE FUND, THE CORE EQUITY FUND AND THE ALL CAP VALUE FUND.
<PAGE>
AMENDED AND RESTATED
EXPENSE DEFERRAL AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT dated as of July __, 1998 by and
between UNDISCOVERED MANAGERS FUNDS, a Massachusetts business trust (the
"Trust"), on behalf of its ________________ Fund series (the "Series"), and
UNDISCOVERED MANAGERS, LLC, a Delaware limited liability company (the "Manager")
amends and restates the Expense Deferral Agreement dated December __, 1997 (the
"Original Agreement") by and between the Trust and the Manager.
WHEREAS, the Manager has been appointed the investment adviser of the
Series pursuant to a Management Agreement dated December __, 1997 between the
Trust and the Manager relating to the Series (the "Management Agreement"); and
WHEREAS, the Trust and the Manager desire to amend and restate the
arrangements described in the Original Agreement relating to certain expenses of
the Series;
NOW, THEREFORE, the Trust and the Manager hereby agree as follows:
1. Until further notice from the Manager to the Trust, the Manager agrees,
subject to Section 2 hereof, to (i) reduce the fees payable to it under the
Management Agreement (but not below zero) and (ii) pay any operating expenses of
the Series, to the extent necessary to limit the operating expenses of the
Series (exclusive of brokerage costs, interest, taxes and extraordinary
expenses) to the annual rate (as a percentage of the average daily net assets
attributable to each class of shares of the Series) of ____ percent for the
Series' Institutional Class shares and ____ percent for the Series' Investor
Class shares.
2. The Series agrees to pay to the Manager (i) the amount of fees that, but
for Section 1 hereof, would have been payable by the Series to the Manager
pursuant to the Management Agreement and (ii) the amount of the operating
expenses of the Series that the Manager paid pursuant to Section 1 hereof
(collectively, "Deferred Fees and Expenses"), subject to the limitations
provided in this Section 2. Such repayment shall be made monthly, but only if
the operating expenses of the Series (exclusive of brokerage costs, interest,
taxes and extraordinary expenses), without regard to such repayment, are at an
annual rate (as a percentage of the average daily net assets attributable to
each class of shares of the Series) of less than ____ percent for the Series'
Institutional Class shares and, subject to the ratification of this Agreement by
the Trustees of the Trust, ____ percent for the Series' Investor Class shares.
Furthermore, the amount of Deferred Fees and Expenses paid by the Series in any
month with respect to a class of shares shall be limited so that the sum of (a)
the amount of
<PAGE>
such payment and (b) the other operating expenses of the Series with respect to
such class of shares (exclusive of brokerage costs, interest, taxes and
extraordinary expenses) do not exceed the foregoing annual percentage rate
applicable to such class of shares.
Deferred Fees and Expenses with respect to any fiscal year of the Trust
shall not be payable by the Series with respect to a class of shares to the
extent that the amounts payable by the Series with respect to such class of
shares pursuant to the immediately preceding two sentences during the period
ending two years after the end of such fiscal year are not sufficient to pay
such Deferred Fees and Expenses. In no event will the Series be obligated to pay
any fees waived or deferred by the Manager with respect to any other series of
the Trust.
3. The Manager may by notice in writing to the Trust terminate, in whole or
in part, its obligation under Section 1 to reduce its fees and bear expenses
with respect to the Series in any period following the date specified in such
notice (or change the percentage specified in Section 1 with respect to any
class of shares of the Series), but no such change shall affect the obligation
(including the amount of the obligation) of the Series to repay amounts of
Deferred Fees and Expenses with respect to periods prior to the date specified
in such notice.
4. A copy of the Agreement and Declaration of Trust establishing the Trust
is on file with the Secretary of The Commonwealth of Massachusetts, and notice
is hereby given that this Agreement is executed with respect to the Series on
behalf of the Trust by an officer of the Trust as an officer and not
individually and that the obligations of or arising out of this Agreement are
not binding upon any of the trustees, officers or shareholders individually but
are binding only upon the assets and property belonging to the Series.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
UNDISCOVERED MANAGERS FUNDS
By ____________________________
Mark P. Hurley, President
UNDISCOVERED MANAGERS, LLC
By ____________________________
Mark P. Hurley, President and CEO
EXHIBIT 99.10(b)
----------------
FORM OF 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.
<PAGE>
December __, 1998
Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
Ladies and Gentlemen:
You have informed us that you propose to register under the Securities Act
of 1933, as amended (the "Act"), and offer and sell from time to time shares of
beneficial interest, without par value ("Shares"), of each of your Undiscovered
Managers Behavioral Value Fund series, Undiscovered Managers Behavioral
Long/Short Fund series, UM International Equity Fund series and UM International
Small Cap Equity Fund series (each such series, a "Series").
We have examined an executed copy of your Amended and Restated Agreement
and Declaration of Trust dated December 3, 1997 (the "Declaration of Trust") on
file in the office of the Secretary of State of The Commonwealth of
Massachusetts. We are familiar with the actions taken by your trustees to
authorize the issue and sale to the public from time to time of authorized and
unissued Shares of each Series. We have also examined a copy of your By-Laws and
such other documents as we have deemed necessary for the purpose of this
opinion.
Based on the foregoing, we are of the opinion that:
1. The beneficial interest of each Series is divided into an unlimited
number of Shares.
2. The issue and sale of the authorized but unissued Shares of each Series
has been duly authorized under Massachusetts law. Upon the original issue and
sale of any of such authorized but unissued Shares and upon receipt by
Undiscovered Managers Funds (the "Trust") of the authorized consideration
therefor in an amount not less than the applicable net asset value, the Shares
so issued will be validly issued, fully paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally
<PAGE>
Undiscovered Managers Funds - 2 - December __, 1998
liable for the obligations of the Trust. However, the Declaration of Trust
disclaims shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Trust or its trustees. The
Declaration of Trust provides for indemnification out of the property of the
particular series of shares for all loss and expense of any shareholder held
personally liable solely by reason of his or her being or having been a
shareholder of that series. Thus, the risk of a shareholder incurring financial
loss on account of being such a shareholder is limited to circumstances in which
that series of shares itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of an indefinite number of Shares for offering and sale pursuant to
the Act. We consent to the filing of this opinion with and as part of your
Registration Statement on Form N-lA (File No. 333-37711) relating to such
offering and sale.
Very truly yours,
Ropes & Gray
-2-
EXHIBIT 99.11
-------------
CONSENT OF INDEPENDENT AUDITORS.
<PAGE>
Independent Auditors' Consent
We consent to the use in this Post-Effective Amendment No. 4 to the
Registration Statement of the Undiscovered Managers Funds (1933 Act File No.
333-37711) on behalf of the Undiscovered Managers Behavioral Growth Fund, the
Undiscovered Managers Special Small Cap Fund, the Undiscovered Managers REIT
Fund, the Undiscovered Managers Small Cap Value Fund, the Undiscovered Managers
Hidden Value Fund, the Undiscovered Managers Core Equity Fund, and the
Undiscovered Managers All Cap Value Fund of our report dated October 2, 1998,
relating to the Funds referenced above, which reports are included in the Annual
Report to Shareholders for the period from December 30, 1997, commencement of
investment operations, to August 31, 1998, which is incorporated by reference in
the Statement of Additional Information which is part of such Registration
Statement.
We also consent to the reference to our Firm under the heading "Financial
Highlights" in the Prospectuses and under the caption "Independent Auditors" in
the Statement of Additional Information of the Registration Statement.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
November 25, 1998
EXHIBIT 99.16
-------------
COMPUTATIONS OF PERFORMANCE DATA.
<PAGE>
UNDISCOVERED MANAGERS FUNDS
TOTAL RETURN PERFORMANCE CALCULATIONS
BEHAVIORAL GROWTH FUND
TOTAL RETURN
- ------------
T = (P-H)/H
WHERE: T = Total Return
P = Present Value
H = Historical Value
EXAMPLE - INSTITUTIONAL CLASS:
SINCE COMMENCEMENT OF OPERATIONS (12/31/97 - 08/31/98):
(948.8-1000)/1000 = -5.12%
EXAMPLE - INVESTOR CLASS:
SINCE INITIAL OFFERING (07/31/98 - 08/31/98): (803.9-1000)/1000 = -19.61%
TOTAL RETURN PERFORMANCE CALCULATIONS
SPECIAL SMALL CAP FUND
TOTAL RETURN
- ------------
T = (P-H)/H
WHERE: T = Total Return
P = Present Value
H = Historical Value
EXAMPLE - INSTITUTIONAL CLASS:
SINCE COMMENCEMENT OF OPERATIONS (12/30/97 - 08/31/98):
(832-1000)/1000 = -16.80%
<PAGE>
TOTAL RETURN PERFORMANCE CALCULATIONS
REIT FUND
TOTAL RETURN
- ------------
T = (P-H)/H
WHERE: T = Total Return
P = Present Value
H = Historical Value
EXAMPLE - INSTITUTIONAL CLASS:
SINCE COMMENCEMENT OF OPERATIONS (1/1/98 - 08/31/98):
(851.2-1000)/1000 = -14.88%
TOTAL RETURN PERFORMANCE CALCULATIONS
SMALL CAP VALUE FUND
TOTAL RETURN
- ------------
T = (P-H)/H
WHERE: T = Total Return
P = Present Value
H = Historical Value
EXAMPLE - INSTITUTIONAL CLASS:
SINCE COMMENCEMENT OF OPERATIONS (12/30/97 - 08/31/98):
(872-1000)/1000 = -12.80%
EXAMPLE - INVESTOR CLASS:
SINCE INITIAL OFFERING (07/31/98 - 08/31/98): (811.2-1000)/1000 = -18.88%
-2-
<PAGE>
TOTAL RETURN PERFORMANCE CALCULATIONS
HIDDEN VALUE FUND
TOTAL RETURN
- ------------
T = (P-H)/H
WHERE: T = Total Return
P = Present Value
H = Historical Value
EXAMPLE - INSTITUTIONAL CLASS:
SINCE COMMENCEMENT OF OPERATIONS (12/31/97 - 08/31/98):
(780.8-1000)/1000 = -21.92%
EXAMPLE - INVESTOR CLASS:
SINCE INITIAL OFFERING (07/31/98 - 08/31/98): (807.3-1000)/1000 = -19.27%
TOTAL RETURN PERFORMANCE CALCULATIONS
CORE EQUITY FUND
TOTAL RETURN
- ------------
T = (P-H)/H
WHERE: T = Total Return
P = Present Value
H = Historical Value
EXAMPLE - INSTITUTIONAL CLASS:
SINCE COMMENCEMENT OF OPERATIONS (12/31/97 - 08/31/98):
(1020-1000)/1000 = 2.00%
EXAMPLE - INVESTOR CLASS:
SINCE INITIAL OFFERING (07/31/98 - 08/31/98): (864.4-1000)/1000 = -13.56%
-3-
<PAGE>
TOTAL RETURN PERFORMANCE CALCULATIONS
ALL CAP VALUE FUND
TOTAL RETURN
- ------------
T = (P-H)/H
WHERE: T = Total Return
P = Present Value
H = Historical Value
EXAMPLE - INSTITUTIONAL CLASS:
SINCE COMMENCEMENT OF OPERATIONS (12/31/97 - 08/31/98):
(922.4-1000)/1000 = -7.76%
EXAMPLE - INVESTOR CLASS:
SINCE INITIAL OFFERING (07/31/98 - 08/31/98): (812.4-1000)/1000 = -18.76%
-4-
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> UNDISCOVERED MGRS - ALL CAP VALUE FUND - INSTITUTIONAL
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 366,793
<INVESTMENTS-AT-VALUE> 306,739
<RECEIVABLES> 11,014
<ASSETS-OTHER> 33,595
<OTHER-ITEMS-ASSETS> 8,451
<TOTAL-ASSETS> 359,799
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,180
<TOTAL-LIABILITIES> 30,180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 396,041
<SHARES-COMMON-STOCK> 25,073
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,710
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 11,078
<ACCUM-APPREC-OR-DEPREC> (60,054)
<NET-ASSETS> 329,619
<DIVIDEND-INCOME> 2,762
<INTEREST-INCOME> 544
<OTHER-INCOME> 0
<EXPENSES-NET> 1,685
<NET-INVESTMENT-INCOME> 1,621
<REALIZED-GAINS-CURRENT> (11,078)
<APPREC-INCREASE-CURRENT> (60,054)
<NET-CHANGE-FROM-OPS> (69,511)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 401,654
<NUMBER-OF-SHARES-REDEEMED> 52,524
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 329,619
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,260
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 73,448
<AVERAGE-NET-ASSETS> 248,618
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> (1.03)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.53
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> UNDISCOVERED MGRS - ALL CAP VALUE FUND - INVESTOR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 366,793
<INVESTMENTS-AT-VALUE> 306,739
<RECEIVABLES> 11,014
<ASSETS-OTHER> 33,595
<OTHER-ITEMS-ASSETS> 8,451
<TOTAL-ASSETS> 359,799
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,180
<TOTAL-LIABILITIES> 30,180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 396,041
<SHARES-COMMON-STOCK> 3,526
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,710
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 11,078
<ACCUM-APPREC-OR-DEPREC> (60,054)
<NET-ASSETS> 329,619
<DIVIDEND-INCOME> 2,762
<INTEREST-INCOME> 544
<OTHER-INCOME> 0
<EXPENSES-NET> 1,685
<NET-INVESTMENT-INCOME> 1,621
<REALIZED-GAINS-CURRENT> (11,078)
<APPREC-INCREASE-CURRENT> (60,054)
<NET-CHANGE-FROM-OPS> (69,511)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 329,619
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,260
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 73,448
<AVERAGE-NET-ASSETS> 46,446
<PER-SHARE-NAV-BEGIN> 14.18
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (2.67)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.52
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> UNDISCOVERED MGRS - BEHAVIORAL GROWTH - INSTITUTIONAL
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 5,474,987
<INVESTMENTS-AT-VALUE> 4,523,009
<RECEIVABLES> 407,877
<ASSETS-OTHER> 33,596
<OTHER-ITEMS-ASSETS> 419,298
<TOTAL-ASSETS> 5,383,780
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89,392
<TOTAL-LIABILITIES> 89,392
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,419,776
<SHARES-COMMON-STOCK> 443,152
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 173,410
<ACCUM-APPREC-OR-DEPREC> (951,978)
<NET-ASSETS> 5,294,388
<DIVIDEND-INCOME> 8,376
<INTEREST-INCOME> 14,031
<OTHER-INCOME> 0
<EXPENSES-NET> 30,635
<NET-INVESTMENT-INCOME> (8,228)
<REALIZED-GAINS-CURRENT> (173,410)
<APPREC-INCREASE-CURRENT> (951,978)
<NET-CHANGE-FROM-OPS> (1,133,616)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,766,150
<NUMBER-OF-SHARES-REDEEMED> 388,146
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,294,388
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22,389
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 142,096
<AVERAGE-NET-ASSETS> 3,519,132
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> (.62)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.86
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> UNDISCOVERED MGRS - BEHAVIORAL GROWTH - INVESTOR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 5,474,987
<INVESTMENTS-AT-VALUE> 4,523,009
<RECEIVABLES> 407,877
<ASSETS-OTHER> 33,596
<OTHER-ITEMS-ASSETS> 419,298
<TOTAL-ASSETS> 5,383,780
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 89,392
<TOTAL-LIABILITIES> 89,392
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,419,776
<SHARES-COMMON-STOCK> 3,392
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 173,410
<ACCUM-APPREC-OR-DEPREC> (951,978)
<NET-ASSETS> 5,294,388
<DIVIDEND-INCOME> 8,376
<INTEREST-INCOME> 14,031
<OTHER-INCOME> 0
<EXPENSES-NET> 30,635
<NET-INVESTMENT-INCOME> (8,228)
<REALIZED-GAINS-CURRENT> (173,410)
<APPREC-INCREASE-CURRENT> (951,978)
<NET-CHANGE-FROM-OPS> (1,133,616)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,294,388
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22,389
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 142,096
<AVERAGE-NET-ASSETS> 47,719
<PER-SHARE-NAV-BEGIN> 14.74
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (2.89)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.85
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> UNDISCOVERED MGRS - CORE EQUITY - INSTITUTIONAL
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 1,299,373
<INVESTMENTS-AT-VALUE> 1,118,955
<RECEIVABLES> 12,363
<ASSETS-OTHER> 33,596
<OTHER-ITEMS-ASSETS> 205,606
<TOTAL-ASSETS> 1,370,520
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32,027
<TOTAL-LIABILITIES> 32,027
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,513,773
<SHARES-COMMON-STOCK> 101,585
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8,157
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,019
<ACCUM-APPREC-OR-DEPREC> (180,418)
<NET-ASSETS> 1,338,493
<DIVIDEND-INCOME> 6,502
<INTEREST-INCOME> 2,812
<OTHER-INCOME> 0
<EXPENSES-NET> 4,246
<NET-INVESTMENT-INCOME> 5,068
<REALIZED-GAINS-CURRENT> (3,019)
<APPREC-INCREASE-CURRENT> (180,418)
<NET-CHANGE-FROM-OPS> (178,369)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,586,277
<NUMBER-OF-SHARES-REDEEMED> 119,415
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,338,493
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 78,953
<AVERAGE-NET-ASSETS> 635,507
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.75
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> UNDISCOVERED MGRS - CORE EQUITY FUND - INVESTOR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 1,299,373
<INVESTMENTS-AT-VALUE> 1,118,955
<RECEIVABLES> 12,363
<ASSETS-OTHER> 33,596
<OTHER-ITEMS-ASSETS> 205,606
<TOTAL-ASSETS> 1,370,520
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32,027
<TOTAL-LIABILITIES> 32,027
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,513,773
<SHARES-COMMON-STOCK> 3,390
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8,157
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 3,019
<ACCUM-APPREC-OR-DEPREC> (180,418)
<NET-ASSETS> 1,338,493
<DIVIDEND-INCOME> 6,502
<INTEREST-INCOME> 2,812
<OTHER-INCOME> 0
<EXPENSES-NET> 4,246
<NET-INVESTMENT-INCOME> 5,068
<REALIZED-GAINS-CURRENT> (3,019)
<APPREC-INCREASE-CURRENT> (180,418)
<NET-CHANGE-FROM-OPS> (178,369)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,338,493
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,175
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 78,953
<AVERAGE-NET-ASSETS> 47,795
<PER-SHARE-NAV-BEGIN> 14.75
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (2.01)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.75
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> UNDISCOVERED MGRS - HIDDEN VALUE - INSTITUTIONAL
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 1,327,457
<INVESTMENTS-AT-VALUE> 946,806
<RECEIVABLES> 11,186
<ASSETS-OTHER> 33,596
<OTHER-ITEMS-ASSETS> 5,696
<TOTAL-ASSETS> 997,284
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32,305
<TOTAL-LIABILITIES> 32,305
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,333,477
<SHARES-COMMON-STOCK> 94,762
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 5,908
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,245
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (380,651)
<NET-ASSETS> 964,979
<DIVIDEND-INCOME> 7,434
<INTEREST-INCOME> 1,685
<OTHER-INCOME> 0
<EXPENSES-NET> 6,300
<NET-INVESTMENT-INCOME> 2,819
<REALIZED-GAINS-CURRENT> 6,245
<APPREC-INCREASE-CURRENT> (380,651)
<NET-CHANGE-FROM-OPS> (371,587)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,903,880
<NUMBER-OF-SHARES-REDEEMED> 617,314
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 964,979
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,606
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 82,612
<AVERAGE-NET-ASSETS> 719,122
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> (2.77)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.76
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> UNDISCOVERED MGRS - HIDDEN VALUE FUND - INVESTOR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 1,327,457
<INVESTMENTS-AT-VALUE> 946,806
<RECEIVABLES> 11,186
<ASSETS-OTHER> 33,596
<OTHER-ITEMS-ASSETS> 5,696
<TOTAL-ASSETS> 997,284
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32,305
<TOTAL-LIABILITIES> 32,305
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,333,477
<SHARES-COMMON-STOCK> 4,136
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 5,908
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,245
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (380,651)
<NET-ASSETS> 964,979
<DIVIDEND-INCOME> 7,434
<INTEREST-INCOME> 1,685
<OTHER-INCOME> 0
<EXPENSES-NET> 6,300
<NET-INVESTMENT-INCOME> 2,819
<REALIZED-GAINS-CURRENT> 6,245
<APPREC-INCREASE-CURRENT> (380,651)
<NET-CHANGE-FROM-OPS> (371,587)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 964,979
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,606
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 82,612
<AVERAGE-NET-ASSETS> 47,033
<PER-SHARE-NAV-BEGIN> 12.09
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (2.34)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.76
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 05
<NAME> UNDISCOVERED MGRS - REIT FUND - INSTITUTIONAL
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 9,938,485
<INVESTMENTS-AT-VALUE> 8,621,778
<RECEIVABLES> 25,362
<ASSETS-OTHER> 33,663
<OTHER-ITEMS-ASSETS> 616,374
<TOTAL-ASSETS> 9,297,177
<PAYABLE-FOR-SECURITIES> 120,430
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54,705
<TOTAL-LIABILITIES> 175,135
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,486,798
<SHARES-COMMON-STOCK> 857,636
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 130,644
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 178,693
<ACCUM-APPREC-OR-DEPREC> (1,316,707)
<NET-ASSETS> 9,122,042
<DIVIDEND-INCOME> 204,184
<INTEREST-INCOME> 13,076
<OTHER-INCOME> 0
<EXPENSES-NET> 48,683
<NET-INVESTMENT-INCOME> 168,577
<REALIZED-GAINS-CURRENT> (189,265)
<APPREC-INCREASE-CURRENT> (1,316,707)
<NET-CHANGE-FROM-OPS> (1,337,395)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,717,058
<NUMBER-OF-SHARES-REDEEMED> 257,621
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 10,459,437
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36,513
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 160,484
<AVERAGE-NET-ASSETS> 5,223,237
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> .20
<PER-SHARE-GAIN-APPREC> (2.06)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 061
<NAME> UNDISCOVERED MGRS - SMALL CAP VALUE - INSTITUTIONAL
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 16,363,161
<INVESTMENTS-AT-VALUE> 12,137,743
<RECEIVABLES> 130,340
<ASSETS-OTHER> 33,529
<OTHER-ITEMS-ASSETS> 1,636,038
<TOTAL-ASSETS> 13,937,650
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 57,901
<TOTAL-LIABILITIES> 57,901
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,026,436
<SHARES-COMMON-STOCK> 1,270,364
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7,565
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 71,166
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,225,418)
<NET-ASSETS> 13,879,749
<DIVIDEND-INCOME> 17,230
<INTEREST-INCOME> 29,663
<OTHER-INCOME> 0
<EXPENSES-NET> 42,435
<NET-INVESTMENT-INCOME> 4,458
<REALIZED-GAINS-CURRENT> 71,166
<APPREC-INCREASE-CURRENT> (4,225,418)
<NET-CHANGE-FROM-OPS> (4,149,794)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,068,590
<NUMBER-OF-SHARES-REDEEMED> 177,415
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 13,779,749
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,827
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 147,678
<AVERAGE-NET-ASSETS> 4,511,155
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (1.60)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.90
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 062
<NAME> UNDISCOVERED MGRS - SMALL CAP VALUE - INVESTOR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 16,363,161
<INVESTMENTS-AT-VALUE> 12,137,743
<RECEIVABLES> 130,340
<ASSETS-OTHER> 33,529
<OTHER-ITEMS-ASSETS> 1,636,038
<TOTAL-ASSETS> 13,937,650
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 57,901
<TOTAL-LIABILITIES> 57,901
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,026,436
<SHARES-COMMON-STOCK> 2,854
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7,565
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 71,166
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,255,418)
<NET-ASSETS> 13,879,749
<DIVIDEND-INCOME> 17,230
<INTEREST-INCOME> 29,663
<OTHER-INCOME> 0
<EXPENSES-NET> 42,435
<NET-INVESTMENT-INCOME> 4,458
<REALIZED-GAINS-CURRENT> 71,166
<APPREC-INCREASE-CURRENT> (4,225,418)
<NET-CHANGE-FROM-OPS> (4,149,794)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 38,368
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 13,779,749
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,827
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 147,678
<AVERAGE-NET-ASSETS> 35,172
<PER-SHARE-NAV-BEGIN> 13.45
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (2.54)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.91
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 07
<NAME> UNDISCOVERED MGRS - SPECIAL SMALL CAP - INSTITUTIONAL
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 13,914,654
<INVESTMENTS-AT-VALUE> 11,080,981
<RECEIVABLES> 69,187
<ASSETS-OTHER> 33,529
<OTHER-ITEMS-ASSETS> 165,442
<TOTAL-ASSETS> 11,349,139
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 62,750
<TOTAL-LIABILITIES> 62,750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,514,346
<SHARES-COMMON-STOCK> 1,085,274
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 394,284
<ACCUM-APPREC-OR-DEPREC> (2,833,673)
<NET-ASSETS> 11,286,389
<DIVIDEND-INCOME> 47,286
<INTEREST-INCOME> 16,177
<OTHER-INCOME> 0
<EXPENSES-NET> 90,909
<NET-INVESTMENT-INCOME> (27,446)
<REALIZED-GAINS-CURRENT> (394,284)
<APPREC-INCREASE-CURRENT> (2,833,673)
<NET-CHANGE-FROM-OPS> (3,255,403)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,289,122
<NUMBER-OF-SHARES-REDEEMED> 747,330
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14,541,792
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 61,497
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 230,786
<AVERAGE-NET-ASSETS> 7,966,764
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> (2.07)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.40
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
