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[undiscovered managers(TM) LOGO]
UNDISCOVERED MANAGERS FUNDS
PROSPECTUS
October 2, 2000
UM Small Cap Growth Fund
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.
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TABLE OF CONTENTS
WHAT YOU SHOULD KNOW ABOUT THE FUND'S INVESTMENT
STRATEGIES, RISKS, PERFORMANCE, EXPENSES AND MANAGEMENT
<TABLE>
<S> <C>
The Fund................................................................................................. 5
The Fund's Investment Objective, Principal Investment Strategies, Principal Risks, etc....................5
The Fund's Fees and Expenses..............................................................................6
Other Policies and Additional Disclosure on Risks.........................................................7
The Fund's Management.....................................................................................8
OPENING AND MAINTAINING YOUR UNDISCOVERED
MANAGERS ACCOUNT
Your Investment..........................................................................................10
Institutional Class Shares...............................................................................10
How Shares are Priced....................................................................................10
Buying Shares............................................................................................11
General Shareholder Services.............................................................................12
Selling Shares...........................................................................................13
Dividends, Distributions and Taxes.......................................................................14
Where to get More Information about the Fund.....................................................Back Cover
</TABLE>
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THE FUND
Undiscovered Managers Funds has thirteen investment portfolios. This Prospectus
offers Institutional Class shares of one of the portfolios - UM Small Cap Growth
Fund (the "Small Cap Growth Fund" or the "Fund").
THE FUND'S INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES, PRINCIPAL
RISKS, ETC.
INVESTMENT OBJECTIVE
Long-term Capital Appreciation
PRINCIPAL INVESTMENT STRATEGIES
The Small Cap Growth Fund seeks to achieve its objective by investing primarily
in common stocks of U.S. companies with market capitalizations of $2.5 billion
or less that the Fund's sub-adviser, Mazama Capital Management, Inc. ("Mazama")
believes possess superior growth characteristics. Mazama utilizes a proprietary
Price Performance Model to assist it in identifying growth companies it believes
are undervalued relative to their management quality and earnings potential.
Under normal market conditions, the Small Cap Growth Fund will invest
substantially all of its assets in common stocks and at least 65% of its assets
in common stocks of companies with market capitalizations of $2.5 billion or
less.
PRINCIPAL RISKS
Investing in the Small Cap Growth Fund involves risks. The Fund may not perform
as well as other investments, and as with all mutual funds, there is the risk
that you could lose money on your investment in the Fund. Factors that could
harm the investment performance of the Fund include:
o A general decline in the U.S. stock markets,
o Poor performance of individual stocks held by the Fund,
o Potentially rapid price changes (volatility) of equity securities and
o The risks associated with investment in small capitalization companies
(such as more abrupt price movements, greater dependence on individual
personnel or products, limited markets and less liquidity than larger, more
established companies)
FUND PERFORMANCE
The Small Cap Growth Fund's performance is variable. Since the Fund commenced
investment operations as of October 2, 2000, this Prospectus does not include a
bar chart showing annual total returns or a table showing average annual total
returns compared against an appropriate broad-based securities market index.
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THE FUND'S FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Institutional Class shares of the Small Cap Growth Fund.
<TABLE>
<CAPTION>
Institutional
Class
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<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases ................ none
Maximum Deferred Sales Charge (Load) ............................ none
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ..... none
Redemption Fees(1) .............................................. none
Exchange Fees ................................................... none
ANNUAL FUND OPERATING EXPENSES (expenses that are
deducted from Fund assets)
Management Fees ................................................. 0.95%
Distribution (12b-1) Fees ....................................... none
Other Expenses(2) ............................................... 0.54%
Total Annual Fund Operating Expenses ............................ 1.49%
Fee Reduction and/or Expense Reimbursement(3) ................... (0.29)%
Net Expenses(3) ................................................. 1.20%
</TABLE>
EXAMPLE (4)
This Example is intended to help you compare the cost of investing in the Small
Cap Growth Fund with the cost of investing in other mutual funds.
This Example assumes that (i) you invest $10,000 in the Fund for the time
periods indicated, (ii) your investment has a 5% return each year, (iii) you
redeem all of your shares at the end of those periods and (iv) the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
Small Cap Growth Fund
---------------------
<S> <C>
One Year ...... $151.61
Three Years ...... $471.00
</TABLE>
(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) Since the Fund is newly-organized, Other Expenses are based on estimated
amounts for the current fiscal year.
(3) Undiscovered Managers, LLC, the Fund's investment adviser, has
contractually agreed, through December 31, 2001, to reduce its fees and/or
pay the expenses of the Fund's Institutional Class shares in order to limit
such class's expenses (exclusive of brokerage costs, interest, taxes and
extraordinary expenses) to the percentage of net assets shown above,
subject to later reimbursement by the Fund in certain circumstances. See
THE FUND'S MANAGEMENT -- FUND EXPENSES below.
(4) Under SEC rules, newly-organized funds, such as the Fund, are required to
show expenses in an example for one- and three-year periods only.
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OTHER POLICIES AND ADDITIONAL DISCLOSURE ON RISKS
OTHER POLICIES
ADDITIONAL FUND INVESTMENTS
The Small Cap Growth Fund may invest its cash in repurchase agreements and other
cash instruments pending investment in equity securities.
PORTFOLIO TURNOVER
The Small Cap Growth Fund is actively managed and consequently may engage in
frequent trading of portfolio securities. High portfolio turnover results in
higher brokerage and other expenses, which could reduce Fund performance. High
portfolio turnover also may increase the amount of taxes payable by the Fund's
shareholders.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
The investment objectives and policies of the Small Cap Growth Fund can be
changed without shareholder approval, except for the policies that are
identified in the Fund's Statement of Additional Information (the "SAI") as
"fundamental."
MORE ABOUT RISK
COMMON STOCKS AND OTHER EQUITY SECURITIES
The Small Cap Growth Fund invests mostly in "common stocks." Common stocks
represent an ownership interest in a company. The Fund can also invest in
securities that can be exercised for or converted into common stocks (such as
warrants or convertible preferred stock). 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 the Fund may sometimes decrease instead of increase. The Fund will
invest primarily 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. The 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
The Small Cap Growth Fund will invest primarily in companies with relatively
small market capitalization. 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
the Fund, due to its investment in companies with smaller capitalization,
therefore may fluctuate more widely than market averages.
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THE FUND'S MANAGEMENT
INVESTMENT ADVISER
The Small Cap Growth Fund is advised by Undiscovered Managers, LLC
("Undiscovered Managers"), 700 North Pearl Street, Dallas, Texas 75201.
Undiscovered Managers was organized in 1997 and has responsibility for the
management of the Fund's affairs, under the supervision of Undiscovered Managers
Funds' Board of Trustees. The Fund's investment portfolio is managed on a
day-to-day basis by Mazama, under the general oversight of Undiscovered Managers
and the Board of Trustees. Undiscovered Managers monitors and evaluates Mazama
to help assure that Mazama is managing the 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 the Fund. Undiscovered Managers also has the
responsibility for the management of the affairs of the other investment
portfolios of Undiscovered Managers Funds.
The Fund pays to Undiscovered Managers a management fee at the annual rate of
0.95% of the Fund's average daily net assets, subject to the fee deferral
arrangement described below.
SUB-ADVISER AND PORTFOLIO MANAGERS
Mazama is the sub-adviser to the Small Cap Growth Fund. As sub-adviser, Mazama,
provides day-to-day management of the Fund's portfolio. Mazama, One SW Columbia
Street, Suite 1860, Portland, Oregon 97258, is the successor firm to Mazama
Capital Management, LLC, which firm was organized in 1997 in connection with the
acquisition by such firm of substantially all of the assets of Black & Company
Asset Management, Inc., an investment advisory firm founded in 1993. Mazama
serves as investment adviser to certain pension and profit sharing plans,
trusts, charitable organizations and other institutional and private investors.
Ronald A. Sauer and Stephen C. Brink, CFA, have day-to-day responsibility for
managing the portfolio of the Small Cap Growth Fund. Helen M. Degener
contributes ongoing strategic advice and research with respect to the portfolio.
Mr. Sauer is a founder and the President and Senior Portfolio Manager at Mazama,
and has over twenty years of investment experience. Prior to founding Mazama in
October 1997, Mr. Sauer was the President and Director of Research from 1994 to
1997 of Black & Company, Inc., which he joined in 1983. Mr. Brink is a Vice
President and the Director of Research at Mazama, and has over 23 years of
investment experience. Prior to joining Mazama in 1997, he was the Chief
Investment Officer from 1991 to 1997 of US Trust's Pacific Northwest office,
where he had been employed since 1984. Ms. Degener is the Chief Investment
Officer of Mazama and has over 30 years of investment experience. Prior to
joining Mazama, she was a Senior Vice President and portfolio manager at
Fiduciary Trust Company International, where she had worked since 1994.
Undiscovered Managers pays Mazama a sub-advisory fee at the annual rate of 0.60%
of the first $200 million of the Fund's average daily net assets, 0.55% of the
next $100 million of such assets and 0.50% of such assets in excess of $300
million.
FUND EXPENSES
Undiscovered Managers has contractually agreed to reduce its management fees and
pay the expenses of the Small Cap Growth Fund in order to limit the operating
expenses of the fund (exclusive of brokerage costs, interest, taxes and
extraordinary expenses) to an annual rate of 1.20% of the average daily net
assets of the fund, subject to the obligation of the Fund to repay Undiscovered
Managers such deferred fees and expenses in future years, if any, when the
Fund's operating expenses (exclusive of brokerage costs, interest, taxes and
extraordinary expenses) fall below the stated percentage rate, but only to the
extent that such repayment would not cause the Fund's operating expenses
(exclusive of brokerage costs, interest, taxes and extraordinary expenses) in
any such future year to exceed 1.20%, and provided that the Fund is not
obligated to repay any such deferred fees and expenses more than three years
after the end of the fiscal year in which they were incurred. The term of this
agreement extends through December 31, 2001 and is
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renewable from year to year thereafter.
OTHER ARRANGEMENTS
Undiscovered Managers Funds has applied for an exemptive order from the
Securities and Exchange Commission to permit Undiscovered Managers, subject to
the approval of Undiscovered Managers Funds' Board of Trustees and certain other
conditions, to enter into sub-advisory agreements with sub-advisers other than
the current sub-adviser of the Fund and the current sub-adviser of any other
investment portfolio of Undiscovered Managers Funds without obtaining
shareholder approval. The exemptive request also seeks to permit the terms of an
existing sub-advisory agreement to be changed or the employment of an existing
sub-adviser to be continued without shareholder approval after events that would
otherwise cause an automatic termination of a sub-advisory agreement if such
changes or continuation are approved by Undiscovered Managers Funds' Board of
Trustees. There is no assurance that the Securities and Exchange Commission will
issue the exemptive order. This Prospectus would be revised and shareholders
notified if the sub-adviser of the Fund is changed.
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YOUR INVESTMENT
INSTITUTIONAL CLASS SHARES
The Small Cap Growth Fund's Institutional Class shares are offered without a
front-end or contingent deferred sales charge and are not subject to any 12b-1
fees.
HOW SHARES ARE PRICED
The price of the Small Cap Growth Fund's shares is based on its net asset value
("NAV"). For the Fund, the NAV per share of a class equals the total value of
the assets allocable to the class, minus the class's liabilities, divided by the
number of the class's outstanding shares.
Excluding any transaction-based or other fees charged by your broker-dealer, the
price you will pay to buy Institutional Class shares of the Fund is the NAV of
such class of shares next calculated after your order is received by the Fund's
transfer or other agent or sub-agent with complete information and meeting all
of the requirements discussed in this Prospectus. Excluding any
transaction-based or other fees charged by your broker-dealer, the amount you
will receive when you sell Institutional Class shares of the Fund is the NAV of
such class of shares next calculated after your order is received by the Fund's
transfer or other agent or sub-agent with complete information and meeting all
of the requirements discussed in this Prospectus.
The Fund's NAV is determined each day the New York Stock Exchange ("NYSE") is
open for regular business, at the earlier of 4:00 p.m. Eastern Time or the close
of regular trading on the NYSE. The NYSE is closed on weekends and national
holidays.
If the Fund's transfer or other agent or sub-agent receives your buy or sell
request in good order before the close of regular trading on the NYSE, you will
pay or receive that day's NAV. If the Fund's transfer or other agent or
sub-agent receives your buy or sell request in good order after the close of
regular trading on the NYSE, you will pay or receive the next day's NAV.
The Fund's securities for which market quotations are readily available are
valued at market value. 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.
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BUYING SHARES
An investor may make an initial purchase of Institutional Class shares of the
Small Cap Growth 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 the Fund is $250,000. A minimum investment of
$10,000 applies to the Trustees of Undiscovered Managers Funds, investment
advisory clients of the sub-advisers (and their directors, officers and
employees) of the investment portfolio of Undiscovered Managers Funds, 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 you if you are a new shareholder in
Undiscovered Managers Funds and you initially invest less than $250,000 but sign
a letter of intent stating your intention to bring your balance to $250,000
within six months after your initial purchase. If you purchase shares through a
financial intermediary and hold such shares through an omnibus account with that
financial intermediary, the minimum initial investment applies to the omnibus
account and not to you individually. Undiscovered Managers reserves the right to
redeem your account at net asset value if you 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.
You may purchase shares of the Fund (i) with cash, (ii) by exchanging securities
on deposit with a custodian acceptable to Undiscovered Managers or (iii) with
any combination of such securities and cash. If you would like to purchase
shares of the Fund in exchange for securities please call 1-888-242-3514 for
additional information on the terms and conditions in order to do so.
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 you
make a purchase by check, redemption proceeds will not be sent to you until the
check paying for the investment has cleared, which may take up to 15 calendar
days.
Upon acceptance of your order, the Fund's transfer agent opens an account,
applies the payment to the purchase of full and fractional Fund shares and mails
to you a statement of account confirming the transaction.
After an account has been established, you may send subsequent investments at
any time directly to the Fund 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 your account number or your name and social security
number.
Initial and subsequent investments can also be made by federal funds wire. You
should instruct your bank 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
FBO: Shareholder Name and Account Number
FOR: Undiscovered Managers Funds
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A bank may charge a fee for transmitting funds by wire.
The Fund and the Fund's 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
Fund does not presently anticipate that it will do so, the Fund reserves the
right to suspend or change the terms of the offering of its shares.
The Fund's 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 Fund 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 are no
front-end or contingent deferred sales charges imposed by the Fund or the
distributor in connection with the Fund's offering of Institutional Class
shares, broker-dealers may charge you 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 Small Cap Growth Fund offers the following shareholder services, which are
more fully described in the SAI. Explanations and forms are available from the
Fund. Telephone redemption and exchange privileges will be established
automatically when you open an account unless you elect on the application to
decline the privileges. Other privileges must be specifically elected. A
signature guarantee may be required to establish these privileges after an
account is opened.
FREE EXCHANGE PRIVILEGE
You may exchange Institutional Class shares of the Fund for Institutional Class
shares of any other investment portfolio of Undiscovered Managers Funds. You may
not exchange Institutional Class shares for Investor Class shares or Class C
shares of any investment portfolio of Undiscovered Manager Funds. You may make
an exchange by written instructions or by telephone (unless you have 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 Fund reserves 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 investment
portfolio of Undiscovered Managers Funds will generally be treated as a sale of
the exchanged shares for federal income tax purposes. The Fund may terminate or
change the terms of the exchange privilege at any time, upon 60 days' notice to
shareholders.
RETIREMENT PLANS
The Fund's Institutional Class shares may be purchased by all types of
tax-deferred retirement plans. The Fund's distributor makes available retirement
plan forms for IRAs.
SYSTEMATIC WITHDRAWAL PLAN
If the value of your account is at least $25,000, you may have periodic cash
withdrawals automatically paid to you or any person designated by you.
AUTOMATIC INVESTMENT PLAN
Voluntary monthly investments of at least $1,000 may be made automatically by
pre-authorized withdrawals from your checking account.
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SELLING SHARES
You can redeem shares of the Small Cap Growth Fund by sending a written request
to:
PFPC Inc.
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181
Attn: Undiscovered Managers Funds
As described below, you may also redeem your shares in the Fund by calling
Undiscovered Managers at 1-800-667-1224. Proceeds resulting from a written or
telephonic redemption request can be wired to your bank account or sent by check
in your name(es) (if multiple registered owners) to your record address(es).
Your 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 your confirmation statement) and should indicate any special
capacity in which you are signing (such as trustee or custodian or on behalf of
a partnership, corporation or other entity). If you request that redemption
proceeds be wired to your bank account you must provide specific wire
instructions.
If (1) you are redeeming shares worth more than $50,000, (2) you are requesting
that the proceeds check be made out to someone other than you (as the registered
owner) or be sent to an address other than the record address, (3) the account
registration has changed within the last 30 days or (4) you are providing
instructions to wire the proceeds to a bank account not designated on the
application, you must have your signature guaranteed by a medallion signature
guarantor. A medallion signature guarantee may be obtained from a domestic bank
or trust company, broker, dealer, clearing agency, savings association, or other
financial institution which is participating in a medallion program recognized
by the Securities Transfer Association. The three recognized medallion programs
are Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature
Program (NYSE MSP). Signature guarantees from financial institutions which are
not participating in one of these programs will not be accepted. Before
submitting the redemption request, you should verify with the guarantor
institution that it is a medallion guarantor. Signature guarantees by notaries
public are not acceptable.
When you telephone a redemption request, the proceeds are wired to the bank
account previously chosen by you. A wire fee (currently $5) will be deducted
from the proceeds.
If you decide to change the bank account to which proceeds are to be wired, you
must send in this change on the Service Options Form with a medallion signature
guarantee. Telephonic redemptions may only be made if your bank is a member of
the Federal Reserve System or has a correspondent bank that is a member of the
System. Unless you indicate otherwise on the account application, Undiscovered
Managers will be authorized to act upon redemption and exchange instructions
received by telephone from you or any person claiming to act as your
representative who can provide Undiscovered Managers with your account
registration and address as it appears on the records of Undiscovered Managers
Funds. Undiscovered Managers will employ these or other reasonable procedures to
confirm that instructions communicated by telephone are genuine. Undiscovered
Managers Funds, the Fund's transfer agent, the Fund's distributor, Undiscovered
Managers and Mazama 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, if you
encounter difficulty in placing a redemption or exchange order by telephone, you
may wish to place the order by mail as described above.
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Proceeds resulting from a written redemption request will normally be mailed to
you within seven days after receipt of your request, if the request is in good
order. Telephonic redemption proceeds will normally be wired to your bank on the
first business day following receipt of a proper redemption request. If you
purchased shares by check and the check was deposited less than 15 calendar days
prior to the redemption request, the Fund may withhold redemption proceeds until
the check has cleared.
The Fund will normally redeem your shares for cash; however, the Fund reserves
the right to pay the redemption price wholly or partly in kind if the Board of
Trustees of Undiscovered Managers Funds determines it to be advisable in the
interest of the remaining shareholders. If portfolio securities are distributed
in lieu of cash, you will normally incur brokerage commissions upon subsequent
disposition of any such securities. However, Undiscovered Managers Funds 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
Undiscovered Managers Funds at the beginning of such period.
If the balance in your account with the Fund is less than a minimum amount set
by the Board of Trustees of Undiscovered Managers Funds from time to time
(currently $250,000 for all accounts), the Fund may close the account and send
the proceeds to you. If you are affected by this policy, you 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 the Fund's net asset value per share.
Undiscovered Managers Funds may suspend the right of redemption and may postpone
payment for more than seven days when the NYSE is closed for other than weekends
or holidays, or if permitted by the rules of the Securities and Exchange
Commission when trading on the NYSE is restricted or during an emergency which
makes it impracticable for the Fund to dispose of its securities or to determine
fairly the value of its net assets, or during any other period permitted by the
Securities and Exchange Commission for the protection of investors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Small Cap Growth Fund declares and pays its net investment income to
shareholders as dividends annually. The 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 Board of Trustees of
Undiscovered Managers Funds. The Board of Trustees may change the frequency with
which the Fund declares or pays 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.
The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended. 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. Long-term capital gain distributions from the Fund are taxable
as long-term capital gains regardless of how long an investor has owned shares
of the Fund. Distributions are taxable to a shareholder of the 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).
Distributions are taxable as described above regardless of whether they are
distributed in cash or additional shares.
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Certain designated dividends from the Fund are expected to be eligible for the
dividends-received deduction for corporate shareholders (subject to a holding
period requirement).
The Fund's transfer agent 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.
Any gain resulting from the sale or exchange of shares of the Fund will
generally be subject to tax.
NOTE: The foregoing summarizes certain tax consequences of investing in the
Fund 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.
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WHERE TO GET MORE INFORMATION ABOUT THE FUND
To find out more information about the Small Cap Growth Fund and Undiscovered
Managers Funds, ask for a free copy of the following:
The SAI provides more information about the Fund. It is filed with the
Securities and Exchange Commission and is incorporated by reference into this
Prospectus, which means that it is legally part of this Prospectus.
The SAI is available, without charge, upon request. In addition, after the
Fund's annual and semi-annual reports to shareholders are required to be
delivered to the Fund's shareholders, such reports will be available, without
charge, upon request. To obtain free copies of the SAI, the Fund's annual and
semi-annual reports to shareholders (after such reports are required to be
delivered to the Fund's shareholders in the future), request other information
and discuss your questions about the Fund and the other investment portfolios of
Undiscovered Managers Funds, you may call toll free 1-888-242-3514 or write to:
Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
You may also view or download this Prospectus, the SAI and other information
about the Fund and the other investment portfolios of Undiscovered Managers
Funds on our Internet site at http://www.undiscoveredmanagers.com.
You can also review and copy the SAI and other information about the Fund and
the other investment portfolios of Undiscovered Managers Funds at the Securities
and Exchange Commission Public Reference Room in Washington, D.C. Call
1-202-942-8090 for information on the operations of the Public Reference Room.
Reports and other information about the Fund and the other investment portfolios
of Undiscovered Managers Funds are available on the Securities and Exchange
Commission's Internet site at http://www.sec.gov, and copies of this information
may be obtained, upon payment of a duplicating fee, by electronic request at the
following E-mail address: [email protected], or by writing to the Securities
and Exchange Commission's Public Reference Section, Washington, D.C. 20549-6009.
(Undiscovered Managers Funds' SEC Investment
Company Act file number is 811-8437)
<PAGE> 17
[UNDISCOVERED MANAGERS(TM) LOGO]
STATEMENT OF ADDITIONAL INFORMATION
October 2, 2000
for
UM SMALL CAP GROWTH FUND
A Series of
UNDISCOVERED MANAGERS FUNDS
This Statement of Additional Information ("SAI") is not a prospectus but
contains information that may be useful to investors that is not included in the
relevant Prospectus. This SAI relates to the Prospectus dated October 2, 2000 of
UM Small Cap Growth Fund (the "Small Cap Growth Fund" or the "Fund") a series of
Undiscovered Managers Funds, and is only authorized for distribution when
accompanied or preceded by such Prospectus. This SAI should be read together
with the aforementioned Prospectus. A free copy of the aforementioned Prospectus
may be obtained by calling 1-888-242-3514 or by sending a request to
Undiscovered Managers Funds, Plaza of the Americas, 700 North Pearl Street,
Suite 1700, Dallas, Texas 75201.
<PAGE> 18
TABLE OF CONTENTS
<TABLE>
<S> <C>
Organization and Classification...................................................................................3
Investment Objectives, Policies and Restrictions..................................................................3
Additional Description of Investments, Investment Practices and Risks.............................................5
Management of the Trust...........................................................................................6
Ownership of Shares of the Fund...................................................................................8
Investment Advisory and Other Services............................................................................8
Portfolio Transactions and Brokerage.............................................................................12
Description of the Trust.........................................................................................13
Additional Purchase and Redemption Information...................................................................15
Net Asset Value..................................................................................................19
Income Dividends, Capital Gain Distributions and Tax Status......................................................20
Calculation of Total Return......................................................................................22
Performance Comparisons..........................................................................................23
Appendix A--Publications That May Contain Fund Information......................................................A-1
Appendix B--Advertising and Promotional Literature..............................................................B-1
</TABLE>
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<PAGE> 19
ORGANIZATION AND CLASSIFICATION
Undiscovered Managers Funds (the "Trust") is an open-end management investment
company organized under the laws of Massachusetts as a Massachusetts business
trust by an Agreement and Declaration of Trust dated September 29, 1997 (as
amended, the "Declaration of Trust"). The Small Cap Growth Fund is a series of
the Trust. The Trust is authorized to issue an unlimited number of full and
fractional shares of beneficial interest in multiple series. The Trustees of the
Trust may, without shareholder approval, divide the shares of any series into
multiple classes of shares having such preferences and special or relative
rights and privileges as the Trustees of the Trust determine.
The Small Cap Growth 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 are not subject to such restriction.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objective and policies of the Small Cap Growth Fund are
summarized in the Prospectus under "The Fund." The investment policies of the
Small Cap Growth Fund set forth in the Prospectus and in this SAI 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 SAI 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
The following investment restrictions are fundamental policies of the Small Cap
Growth Fund.
The Fund will not:
1. Borrow money in excess of 33 1/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made.
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
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<PAGE> 20
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.
Although the Fund is permitted to borrow money to a limited extent, the Fund
currently does not 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 shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of such
investment.
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<PAGE> 21
ADDITIONAL DESCRIPTION OF INVESTMENTS,
INVESTMENT PRACTICES AND RISKS
The following is an additional description of certain investments, investment
practices and risks of the Small Cap Growth Fund.
REPURCHASE AGREEMENTS
Any assets of the Small Cap Growth Fund 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, the 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 Securities and Exchange Commission is
currently of the view that repurchase agreements maturing in more than seven
days are illiquid securities.
LOANS OF SECURITIES
The Small Cap Growth Fund may lend its 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 Fund.
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. The 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 the Fund will have on loan at any
given time securities totaling more than one-third of its net assets. The 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.
LEVERAGE
Although it is not the current intention of the Small Cap Growth Fund to engage
in borrowing, the Fund may borrow money provided that the total amount borrowed
and outstanding at the time the borrowing is made does not exceed 33 1/3% of the
value of the Fund's total assets (not including the amount borrowed). The use of
leverage through borrowing creates an opportunity for increased net income, but,
at the same time, creates special risks. There can be no assurance that a
leveraging strategy will be successful during any period in which it is
employed. The intent
-5-
<PAGE> 22
of using leverage would be to provide the holders of the Fund's shares with a
potentially higher return. Leverage creates risks for the Fund, including the
likelihood of greater volatility of the net asset value and market price of the
Fund's shares. To the extent the income derived from securities purchased with
funds received from leverage exceeds the cost of leverage, the Fund's return
will be greater than if leverage had not been used. Conversely, if the income
from the securities purchased with such funds is not sufficient to cover the
cost of leverage, the return to the Fund will be less than if leverage had not
been used, and therefore the amounts available for distribution to the Fund's
shareholders as dividends and other distributions will be reduced or eliminated.
In the latter case, the Fund's sub-adviser in its best judgment nevertheless may
determine to maintain the Fund's leveraged position if it deems such action to
be appropriate under the circumstances. During periods in which the Fund is
using leverage, the fees paid by the Fund to Undiscovered Managers, LLC
("Undiscovered Managers") for investment advisory and administrative services
will be higher than if the Fund did not use leverage because the fees paid will
be calculated on the basis of the Fund's total net assets, including the amount
borrowed.
MANAGEMENT OF THE TRUST
The Trustees of the Trust are responsible for generally overseeing the conduct
of the Trust's business. Subject to such policies as the Trustees of the Trust
may determine, Undiscovered Managers, the Small Cap Growth Fund's investment
adviser, has responsibility for the management of the Fund's affairs. The Fund's
investment portfolio is managed on a day-to-day basis by the Fund's sub-adviser,
Mazama Capital Management, Inc. ("Mazama") under the general oversight of
Undiscovered Managers and the Trustees 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 (41)--Trustee and President. President and Chief Executive
Officer of Undiscovered Managers 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 (39)--Trustee. 808 Brannan Street, 2nd Floor, San Francisco,
California 94103; President and Chief Executive Officer of Zatso (formerly known
as ReacTV), an online news broadcasting firm, 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.
MATTHEW J. KILEY (38)--Trustee. 849 Foxfield Road, Lower Gwynedd, Pennsylvania
19002; self-employed; formerly Executive Vice President of Campus Services at
ARAMARK from May, 1998 to October, 1999 and Executive Vice President of Sports
and Entertainment and Vice
-6-
<PAGE> 23
President of Global Food and Support Services at ARAMARK Corp. from September,
1996 to May, 1998; formerly Manager at McKinsey & Company from January, 1990 to
September, 1996.
ROBERT P. SCHMERMUND (45)--Trustee. 900 19th Street, N.W., Suite 400,
Washington, D.C. 20006; Communications Director of America's Community Bankers
since January, 1993.
BRIAN J. O'NEILL (32)--Treasurer. 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406; Director of Financial Reporting Department for PFPC Inc.,
since June, 1994.
PATRICIA L. DUNCAN (37)--Secretary. Vice President-Fund Operations of
Undiscovered Managers since January, 2000, formerly Registered Marketing
Administrator of Undiscovered Managers from December, 1997 to January, 2000;
formerly Executive Secretary at Prentiss Properties Trust from April, 1994 to
December, 1997.
----------
* Trustees who are "interested persons" (as defined in the 1940 Act) of the
Trust or of Undiscovered Managers.
The address of each Trustee and officer of the Trust affiliated with
Undiscovered Managers is Plaza of the Americas, 700 North Pearl Street, Dallas,
Texas 75201.
The Trust pays no compensation to any of 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 the Fund or one or
more other investment portfolios of the Trust on the normal payment date for
such fees. As a result of this method of calculating the deferred payments, the
Fund, upon making the deferred payments, will be in the same financial position
as if the fees had been paid on the normal payment dates.
The following table sets forth information covering the total compensation paid
(or deferred in lieu of current payment) by the Trust during its fiscal year
ended August 31, 2000 to the persons who served as Trustees during such period:
-7-
<PAGE> 24
<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(1) $10,000
Matthew J. Kiley $10,000 $10,000
Robert P. Schmermund $10,000 $10,000
</TABLE>
----------
* No Trustee received any compensation from any mutual fund affiliated with
Undiscovered Managers, other than the Trust.
(1) Roger B. Keating deferred receipt of $10,000 of such compensation pursuant
to the fee deferral arrangements described above.
OWNERSHIP OF SHARES OF THE FUND
As of October 1, 2000, Undiscovered Managers owned of record and beneficially
100% of the outstanding shares of the Small Cap Growth Fund, and as a result,
may be deemed to "control" the Fund as that term is defined in the 1940 Act. As
of such date, the Trustees and officers of the Trust did not own beneficially
any shares of the Fund, except for such ownership that may be attributed to Mark
Hurley, a Trustee and the President of the Trust, through Undiscovered Managers'
ownership of shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER AND SUB-ADVISER
As described in the Prospectus, Undiscovered Managers is the investment adviser
of the Small Cap Growth Fund and as such, has responsibility for the management
of the Fund's affairs, under the supervision of the Trust's Board of Trustees.
The Fund's investment portfolio is managed on a day-to-day basis by Mazama,
under the general oversight of Undiscovered Managers and the Board of Trustees.
See "The Fund" in the Prospectus. Undiscovered Managers is a limited liability
company organized under the laws of Delaware. Mark P. Hurley and AMRESCO, Inc.,
a publicly traded corporation engaged in residential mortgage banking,
commercial mortgage banking, asset management and commercial finance, each own
beneficially more than 25% of the voting securities of Undiscovered Managers and
therefore may be regarded to control Undiscovered Managers for purposes of the
1940 Act. As disclosed in this SAI 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) Patricia L. Duncan is the Secretary of the Trust as well as
Vice President-Fund Operations of Undiscovered Managers. Undiscovered Managers
is
-8-
<PAGE> 25
further affiliated with the Fund through its ownership as of October 1, 2000,
of 100% of the outstanding shares of the Fund.
Under the Fund's advisory agreement with Undiscovered Managers, Undiscovered
Managers is entitled to fees, payable monthly, of a certain percentage of the
average daily net asset value of the Fund. For a description of such fees, see
"The Fund -- The Fund's Management" in the Prospectus.
As described in the Prospectus, Undiscovered Managers has contractually agreed
to an arrangement to limit the Fund's expenses. See "Trust Expenses" below.
The Fund's investment portfolio is managed on a day-to-day basis by Mazama, the
Fund's sub-adviser. Mazama is regarded for purposes of the 1940 Act as being
controlled by Ronald A. Sauer, who is a principal of the firm and owns more than
25% of its voting securities.
Under the sub-advisory agreement relating to the Fund between Undiscovered
Managers and Mazama, Mazama is entitled to fees, payable monthly by Undiscovered
Managers out of the fees Undiscovered Managers receives, of a certain percentage
of the average daily net asset value of the Fund. For a description of such
fees, see "The Fund -- The Fund's Management" in the Prospectus.
The Fund's advisory agreement and related 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 Fund and (ii) by vote of a majority of the
Trustees who are not "interested persons" of the Trust, Undiscovered Managers
or, in the case of the sub-advisory agreement, Mazama, 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 the Fund's advisory agreement must be approved
by vote of a majority of the outstanding voting securities of the 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 the sub-advisory agreement must be approved by vote of a majority
of the outstanding voting securities of the 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 Fund's 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 Fund, upon sixty days' written notice, and by Undiscovered
Managers upon ninety days' written notice, and shall automatically terminate in
the event of its assignment. The Fund's advisory agreement provides that
Undiscovered Managers owns all rights to and control of the names "Undiscovered
Managers" and "UM." The Fund's 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 the letters
"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
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<PAGE> 26
the 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.
The 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 Fund, upon sixty days' written notice, and
it terminates automatically in the event of its assignment and upon termination
of the advisory agreement.
The Fund's advisory agreement and sub-advisory agreement provide that
Undiscovered Managers or Mazama 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 has applied 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
the Fund or any other investment portfolio of the Trust and amend sub-advisory
agreements with sub-advisers without obtaining shareholder approval. See "The
Fund -- The Fund's Management" 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; all taxes and fees payable to governmental agencies; the
cost of any certificates representing shares of the Small Cap Growth Fund and
the other investment portfolios of the Trust; 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 Fund and the other investment
portfolios of the Trust; the cost of services, including services of counsel,
required in connection with the preparation of, and the cost of printing, the
Trust's registration statements and prospectuses, including amendments and
revisions thereto, annual, semiannual and other periodic reports of the Trust,
and notices and proxy solicitation material furnished to shareholders or
regulatory authorities, to the extent that any such materials relate to the
Trust or its shareholders; and the Trust's expenses of bookkeeping, accounting,
auditing and financial reporting, including related clerical expenses.
As described in the Prospectus, Undiscovered Managers has contractually agreed
to reduce its management fees and pay the expenses of the Fund's shares in order
to limit the Fund's expenses (exclusive of brokerage costs, interest, taxes and
extraordinary expenses) to an annual rate of 1.20% of the average daily net
assets of the Fund, subject to the obligation of the Fund to repay Undiscovered
Managers such deferred fees and expenses in future years, if any, when the
Fund's expenses (exclusive of brokerage costs, interest, taxes and extraordinary
expenses) fall below 1.20%, but only to the extent that such repayment would not
cause the Fund's expenses (exclusive of brokerage costs, interest, taxes
-10-
<PAGE> 27
and extraordinary expenses) in any such future year to exceed 1.20%, and
provided that the Fund is not obligated to repay any such deferred fees and
expenses more than three years after the end of the fiscal year in which they
were incurred. The term of this agreement extends through December 31, 2001 and
is renewable from year to year thereafter.
ADMINISTRATOR
Pursuant to an Administrative Services Agreement between the Trust and
Undiscovered Managers, Undiscovered Managers has agreed to provide all
administrative services to the Fund, including but not limited to corporate
secretarial, treasury, blue sky and fund accounting services. For these
services, the 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 PFPC Inc. to provide certain of the foregoing
administrative services, at the expense of Undiscovered Managers.
DISTRIBUTOR
The Fund's shares are sold on a continuous basis by the Trust's distributor,
Provident Distributors, Inc. (the "Distributor"), 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406. 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.
ADDITIONAL ARRANGEMENTS
CUSTODIAL ARRANGEMENTS. The Bank of New York, 1 Wall Street, New York, New York
10286, is the custodian for the Fund. The custodian holds in safekeeping
certificated securities and cash belonging to the Fund and, in such capacity, is
the registered owner of securities held in book entry form belonging to the
Fund. Upon instruction, the custodian receives and delivers cash and securities
of the Fund in connection with Fund transactions and collects all dividends and
other distributions made with respect to Fund portfolio securities. The
custodian also maintains certain accounts and records of the Fund.
INDEPENDENT AUDITORS. The Fund's independent auditors are Deloitte & Touche LLP,
116-300 Village Blvd., Princeton, New Jersey 08540. Deloitte & Touche LLP
conducts an annual audit of the Fund's financial statements, assists in the
preparation of the Fund's federal and state income tax returns and consults with
the Fund as to matters of accounting and federal and state income taxation.
TRANSFER AND DIVIDEND PAYING AGENT. PFPC Inc., 4400 Computer Drive, Westborough,
Massachusetts 01581, is the transfer and dividend paying agent of the Fund.
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<PAGE> 28
CODE OF ETHICS
The Trust, Undiscovered Managers, Mazama and the Distributor have adopted Codes
of Ethics pursuant to the requirements of the 1940 Act. These Codes of Ethics
permit personnel subject to the Codes to invest in securities, including
securities that may be purchased or held by the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions on stock exchanges and other agency transactions for the account of
the Small Cap Growth Fund involve the payment by the Fund of negotiated
brokerage commissions. Such commissions vary among different brokers. A
particular broker may charge different commissions according to such factors as
the difficulty and size of the transaction. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Fund usually includes an undisclosed dealer commission,
markup or markdown. In underwritten offerings, the price paid by the Fund
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer.
In addition to selecting portfolio investments, Mazama selects brokers or
dealers to execute securities purchases and sales for the Fund's account. Mazama
selects only brokers or dealers which it believes are financially responsible,
will provide efficient and effective services in executing, clearing and
settling an order and will charge commission rates which, when combined with the
quality of the foregoing services, will produce best price and execution for the
transaction. This does not necessarily mean that the lowest available brokerage
commission will be paid. However, the commissions are believed to be competitive
with generally prevailing rates. Mazama 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.
Mazama'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 Mazama's expenses. Such services may be used by
Mazama in managing other client accounts and in some cases may not be used with
respect to the Fund. 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
-12-
<PAGE> 29
best price and execution, purchases of shares of the 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.
Mazama may cause the Fund to pay a broker-dealer that provides brokerage and
research services to Mazama an amount of commission for effecting a securities
transaction for the Fund in excess of the amount another broker-dealer would
have charged for effecting that transaction. Mazama 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 Mazama's overall responsibilities to
the Fund and its other clients. Mazama's authority to cause the Fund to pay
greater commissions is also subject to such policies as the Trustees of the
Trust may adopt from time to time.
Transactions in unlisted securities are carried out through broker-dealers who
make the primary market for such securities unless, in the judgment of Mazama, a
more favorable price can be obtained by carrying out such transactions through
other brokers or dealers.
DESCRIPTION OF THE TRUST
As stated previously, the Trust was organized as a Massachusetts business trust
by the Declaration of Trust dated September 29, 1997. The Declaration of Trust
currently permits the Trustees to issue an unlimited number of full and
fractional shares of each investment portfolio of the Trust (a "series"). The
Trust currently has thirteen series, one of which is the Small Cap Growth Fund.
Each share of the Fund represents an equal proportionate interest in the Fund
with each other share of the Fund and is entitled to a proportionate interest in
the dividends and distributions from the Fund. The shares of the Fund do not
have any preemptive rights. Upon termination of the Fund, whether pursuant to
liquidation of the Trust or otherwise, shareholders of the Fund are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. Shares are freely transferable, are not convertible and may be
redeemed in accordance with the terms and provisions in the Prospectus. The
Declaration of Trust 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 the Fund, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Fund or other investment portfolio
of the Trust affected. The Declaration of Trust further provides that the
Trustees may also terminate the Trust or the Fund upon written notice to the
shareholders.
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Currently, the Fund only offers Institutional Class shares. In general, expenses
of the Fund are borne by all the shares in the Fund, regardless of class, on a
pro rata basis relative to the net assets of each class.
VOTING RIGHTS
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 Securities and
Exchange Commission, shareholders of all series and classes vote together,
irrespective of series or class, on the election of Trustees and the selection
of the Trust's independent accountants, but shareholders 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 10 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.
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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
the 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
that relates to the Fund. The Declaration of Trust provides for indemnification
out of assets of the Fund or assets attributable to the particular class of the
Fund for all loss and expense of any shareholder held personally liable for the
obligations of the 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
HOW TO BUY SHARES
Subject to minimum initial investment requirements and certain other conditions,
an investor may make an initial purchase of shares of the Small Cap Growth Fund
by submitting a completed application form and payment to:
Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181
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The procedures for purchasing shares of the Fund are summarized in "Your
Investment -- Buying Shares" in the Prospectus. The Prospectus also explains
total offering price of the shares.
As described in the Prospectus, shares of the Fund may be purchased by
exchanging securities on deposit with a custodian acceptable to Undiscovered
Managers. Such a purchase 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 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.
Undiscovered Managers will not approve the acceptance of securities in exchange
for shares of the Fund unless (1) Undiscovered Managers and Mazama 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 the Fund's shares may purchase additional shares of the Fund by an
exchange of securities.
OFFERING PRICE
The public offering price of shares of the Small Cap Growth Fund is the net
asset value of the Fund. On each purchase of shares, the net asset value is
invested in the Fund. Shares are purchased at the public offering price next
determined after PFPC Inc. or another agent or sub-agent of the Fund receives
the investor's order in proper form. If PFPC Inc. or another agent or sub-agent
of the Fund receives an order in proper form before the close of regular trading
on the New York Stock Exchange (the "NYSE"), the investor will pay or receive
that day's net asset value. If PFPC Inc. or another agent or sub-agent of the
Fund receives an order in proper form after the close of regular trading on the
NYSE, the investor will pay or receive the next day's net asset value.
SHAREHOLDER SERVICES
OPEN ACCOUNTS
A shareholder's investment in the Small Cap Growth Fund is automatically
credited to an open account maintained for the shareholder by PFPC Inc.
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 PFPC
Inc. will send each shareholder a statement providing federal tax information on
dividends and distributions paid to the
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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 "Your
Investment -- General Shareholder Services," provides for monthly, quarterly,
semiannual or annual withdrawal payments of $1,000 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 medallion signature guarantee will be required
on the Plan application. Income dividends and capital gain distributions will be
reinvested at the net asset value determined as of the close of regular trading
on the NYSE 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 the Fund and have the proceeds applied
on the same day to purchase the same class of shares of any other investment
portfolio of the Trust. The value of shares exchanged must be at least $1,000
and all exchanges are subject to the minimum investment requirement of the other
investment portfolio of the Trust into which the exchange is being made. This
option is summarized in the Prospectus under "Your Investment -- General
Shareholder Services."
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 PFPC
Inc., or (2) sending a written exchange request to PFPC Inc. accompanied by an
account application for the appropriate other investment portfolio of the Trust.
The Trust reserves the right to modify this exchange privilege without prior
notice.
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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 "Your Investment -- General Shareholder Services," the Prospectus refers
to IRAs established under a prototype plan made available by the Distributor.
These plans may be funded with shares of the 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 the Small Cap Growth Fund are
summarized in the Prospectus under "Your Investment -- Selling Shares."
Except as noted below, signatures on redemption requests must be guaranteed by a
medallion signature guarantor. A medallion signature guarantee may be obtained
from a domestic bank or trust company, broker, dealer, clearing agency, savings
association, or other financial institution which is participating in a
medallion program recognized by the Securities Transfer Association. The three
recognized medallion programs are Securities Transfer Agents Medallion Program
(STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange,
Inc. Medallion Signature Program (NYSE MSP). Signature guarantees from financial
institutions which are not participating in one of these programs will not be
accepted. Signature guarantees by notaries public are not acceptable. However,
as noted in the Prospectus, a medallion 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 NYSE on a day
when the NYSE is open for business. Requests made after that time or on a day
when the NYSE 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 PFPC Inc. 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 PFPC Inc. 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
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<PAGE> 35
redemptions may only be made if an investor's bank is a member of the Federal
Reserve System or has a correspondent bank that is a member of the System. If
the account is with a savings bank, it must have only one correspondent bank
that is a member of the System. The Trust, PFPC Inc., the Distributor,
Undiscovered Managers and Mazama 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
PFPC Inc. or an approved broker-dealer or its authorized designee in proper
form. Proceeds resulting from a written redemption request will normally be
mailed to you within seven days after receipt of your request in good order.
Telephonic redemption proceeds will normally be wired on the first business day
following receipt of a proper redemption request. In those cases where you have
recently purchased your shares by check and your check was received less than
fifteen days prior to the redemption request, the Fund may withhold redemption
proceeds until your check has cleared.
The Fund will normally redeem shares for cash; however, the 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."
NET ASSET VALUE
As indicated in the Prospectus, the net asset value of the Small Cap Growth Fund
is determined and the shares of the Fund are priced as of the earlier of 4:00
p.m., Eastern Time, or the close of regular trading on the NYSE, on each
Business Day. A "Business Day" is any day the NYSE is open for regular business.
Currently the NYSE is closed in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Valuations of securities purchased by the Fund are supplied by independent
pricing services used by PFPC Inc., as sub-administrator. Equity securities
which are listed or admitted to trading on a national securities exchange or
other market trading system which reports actual transaction prices on a
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<PAGE> 36
contemporaneous basis will be valued at the last sales price on the exchange on
which the security is principally traded. Equity securities for which there is
no sale on that day and equity securities traded only in the over-the-counter
market will be valued at their closing bid prices obtained from one or more
dealers making markets for such securities or, if market quotations are not
readily available, at their fair value as determined in good faith by or under
the direction of the Board of Trustees of the Trust.
Generally, trading in foreign securities markets is substantially completed each
day at various times prior to the close of regular trading on the NYSE.
Occasionally, events affecting the value of equity securities of non-U.S.
issuers not traded on a U.S. exchange may occur between the completion of
substantial trading of such securities for the day and the close of regular
trading on the NYSE. If events materially affecting the value of the Fund's
portfolio securities of non-U.S. issuers occur during such period, then these
securities will be valued at their fair value as determined in good faith by or
in accordance with procedures approved by the Board of Trustees.
INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS
As described in the Prospectus under "Dividends, Distributions and Taxes" it is
the policy of the Fund to pay its shareholders, as dividends, substantially all
net investment income and to distribute at least 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 Fund based upon the net asset value determined as of
the close of regular trading on the NYSE 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 PFPC Inc. In order for a change
to be in effect for any dividend or distribution, it must be received by PFPC
Inc. 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.
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (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%
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of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and with no more than 25% of the value of its total
assets invested in the securities (other than those of the U.S. government or
other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades and businesses. If it qualifies for treatment as a regulated
investment company that is accorded special tax treatment, 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. If the Fund does not qualify for
taxation as a regulated investment company for any taxable year, the Fund's
income will be subject to corporate income taxes imposed at the Fund level, and
all distributions from earnings and profits, including distributions of net
exempt-interest income and net capital gain, will be taxable to shareholders as
ordinary income. In addition, in order to requalify for taxation as a regulated
investment company, the Fund may be required to recognize unrealized gains, pay
substantial taxes and interest, and make certain distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of the
Fund's "required distribution" over its actual distributions in any calendar
year. Generally, the "required distribution" is an amount at least equal to the
sum of 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. The Fund intends to make
distributions sufficient to avoid imposition of the excise tax. Distributions
declared by the 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 the 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 the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Shareholders of the 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 the 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 maximum tax rate of 20% for
shareholders who are individuals), if any, will be taxable to shareholders as
such, without regard to how long a shareholder has held shares of the Fund.
In general, sales, redemptions and exchanges of the 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 or loss. In general, if a shareholder sells
Fund shares at a loss within six months after purchasing the shares or loss, the
loss
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will be treated as a long-term capital loss to the extent of any long-term
capital gain distributions received by the shareholder. Furthermore, no loss
will be allowed on the sale of Fund shares to the extent the shareholder
acquired other shares of the same Fund within 30 days prior to the sale of the
loss shares or 30 days after such sale.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and regulations currently in effect. For the complete provisions,
reference should be made to the pertinent Code sections and regulations. The
Code and regulations are subject to change by legislative or administrative
action.
Dividends and distributions also may be subject to state and local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state and local taxes.
The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of the Fund, including the possibility that distributions
may be subject to a 30% U.S. withholding tax (or a reduced rate of withholding
provided by treaty).
The Fund is generally required to withhold and remit to the U.S. Treasury 31% of
the taxable dividends and other distributions paid to any shareholder who fails
to furnish the Fund with a correct taxpayer identification number (TIN), who has
under-reported dividends or interest income, or who fails to certify to the Fund
that he or she is not subject to such withholding.
The Internal Revenue Service recently revised its regulations affecting the
application to foreign investors of the back-up withholding and withholding tax
rules discussed above. The new regulations will generally be effective for
payments made after December 31, 2000. In some circumstances, the new rules will
increase the certification and filing requirements imposed on foreign investors
in order to qualify for exemption from the 31% back-up withholding tax and for
reduced withholding tax rates under income tax treaties. Foreign investors in
the Fund should consult their tax advisers with respect to the potential
application of these new regulations.
CALCULATION OF TOTAL RETURN
Quotations of average annual total return for the Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class for periods of one, five, and ten years (or for
such shorter periods as shares of the Fund or class have been offered),
calculated pursuant to the following formula: P (1 + T) [n exponent]= ERV (where
P = a hypothetical initial payment of $1,000, T = the average annual total
return, n = the number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). Except as
noted below, all total return figures reflect the deduction of a proportional
share of Fund expenses on an annual basis, and assume that (i) the maximum sales
load (or other charges deducted from payments) is deducted from the initial
$1,000 payment, (ii) any deferred sales load will be deducted at the times, in
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the amounts and under the terms disclosed in the Prospectus and (iii) all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. Quotations of total return may also be
shown for other periods and without the deduction of front-end or contingent
deferred sales charges. Aggregate total return may also be shown and is
calculated in a similar manner, except that the results are not annualized. The
Fund may also, with respect to certain periods of less than one year, provide
total return information for that period that is unannualized. Any such
information would be accompanied by standardized total return information.
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.
The Fund commenced investment operations as of October 2, 2000.
PERFORMANCE COMPARISONS
TOTAL RETURN. The Fund may from time to time include its total return
information in advertisements or in information furnished to present or
prospective shareholders. The 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
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<PAGE> 40
return performance (if available) reflecting deduction of expenses and sales
charges. Performance is adjusted using quantitative techniques to reflect the
risk profile of the fund. The ratings are derived from a purely quantitative
system that does not utilize the subjective criteria customarily employed by
rating agencies such as Standard & Poor's and Moody's Investors Service, Inc.
CDA/WIESENBERGER'S MANAGEMENT RESULTS ("Wiesenberger") publishes mutual fund
rankings and is distributed monthly. The rankings are based entirely on total
return calculated by Wiesenberger 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). Wiesenberger 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 Fund 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.
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
NYSE, although the common stocks of a few companies listed on the American Stock
Exchange or traded over-the-counter are included. The 500 companies represented
include 400 industrial, 60 transportation and 40 financial services concerns.
The S&P 500 represents about 80% of the market value of all issues traded on the
NYSE. The S&P 500 is the most common index for the overall U.S. stock market.
Performance information about the Fund will be provided in the Fund's annual
reports to shareholders, which will be available upon request and without
charge. In addition, from time to time, articles about the Fund regarding
performance, rankings and other characteristics of the Fund may appear in
publications including, but not limited to, the publications included in
Appendix A. In particular, the performance of the Fund 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 Fund. References to or
reprints of such articles may be used in the Fund's promotional literature.
References to articles regarding personnel of the sub-advisers who have
portfolio management responsibility may also be used in the Fund's promotional
literature. For additional information about the Fund's advertising and
promotional literature, see Appendix B.
-24-
<PAGE> 41
APPENDIX A
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
<TABLE>
<S> <C>
ABC and affiliates Financial Planning on Wall Street
Adam Smith's Money World Financial Research Corp.
America On Line Financial Services Week
Anchorage Daily News Financial World
Atlanta Journal-Constitution Fitch Insights
Arizona Republic Forbes
Austin American Statesman Fort Lauderdale Sun Sentinel
Baltimore Sun Fort Worth Star-Telegram
Bank Investment Marketing Fortune
Barron's Fox Network and affiliates
Bergen County Record (NJ) Fund Action
Bloomberg Business News Fund Decoder
Bloomberg Wealth Manager Global Finance
Bond Buyer (The) Guarantor
Boston Business Journal Hartford Courant
Boston Globe Houston Chronicle
Boston Herald INC
Broker World Indianapolis Star
Business Radio Network Individual Investor
Business Week Institutional Investor
CBS and affiliates International Herald Tribune
CDA Investment Technologies Internet
CFO Investment Advisor
Changing Times Investment Company Institute
Chicago Sun Times Investment Dealers Digest
Chicago Tribune Investment Profiles
Christian Science Monitor Investment Vision
Christian Science Monitor News Service Investor's Business Daily
Cincinnati Enquirer IRA Reporter
Cincinnati Post Journal of Commerce
CNBC Kansas City Star
CNN KCMO (Kansas City)
Columbus Dispatch KOA-AM (Denver)
CompuServe LA Times
Dallas Business Journal Leckey, Andrew (syndicated column)
Dallas Morning News Lear's
Denver Post Life Association News
Des Moines Register Lifetime Channel
Detroit Free Press Miami Herald
Donoghues Money Fund Report Milwaukee Sentinel
Dorman, Dan (syndicated column) Money Magazine
Dow Jones News Service Money Maker
Economist Money Management Letter
FACS of the Week Morningstar
Fee Adviser Mutual Fund Market News
Financial News Network Mutual Funds Magazine
Financial Planning National Public Radio
</TABLE>
A-1
<PAGE> 42
<TABLE>
<S> <C>
National Underwriter USA Today
NBC and affiliates USA TV Network
New England Business Value Line
New England Cable News Wall Street Journal
New Orleans Times-Picayune Wall Street Letter
New York Daily News Wall Street Week
New York Times Washington Post
Newark Star Ledger WBZ
Newsday WBZ-TV
Newsweek WCVB-TV
Nightly Business Report WEEI
Orange County Register WHDH
Orlando Sentinel Worcester Telegram
Palm Beach Post World Wide Web
Pension World Worth Magazine
Pensions and Investments WRKO
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Reuters
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury News
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
</TABLE>
A-2
<PAGE> 43
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
investment portfolio
-- 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 Trust's
investment portfolios. 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 Trust's
investment portfolios as 401(k) or retirement plan funding vehicles
produced by industry authorities, research organizations and
publications.
B-1
