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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Acadian Emerging Markets Portfolio
Institutional Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the portfolio dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolio by contacting the UAM Funds at the address listed
above.
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Table Of Contents
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Description of Permitted Investments.......................................... 1
What Investment Strategies May the Portfolio Use?........................... 1
Debt Securities............................................................. 1
Derivatives................................................................. 8
Equity Securities...........................................................16
Foreign Securities..........................................................18
Investment Companies........................................................22
Repurchase Agreements.......................................................22
Restricted Securities.......................................................22
Securities Lending..........................................................23
When Issued Transactions....................................................23
Investment Policies of the Portfolio..........................................24
Fundamental Policies........................................................24
Non-Fundamental Policies....................................................24
Management Of The Fund........................................................25
Principal Shareholders........................................................27
Investment Advisory and Other Services........................................27
Investment Adviser..........................................................27
Distributor.................................................................29
Shareholder Servicing Arrangements..........................................29
Administrative Services.....................................................30
Custodian...................................................................31
Independent Accountants.....................................................31
Brokerage Allocation and Other Practices......................................31
Selection of Brokers........................................................31
Simultaneous Transactions...................................................32
Brokerage Commissions.......................................................32
Capital Stock and Other Securities............................................33
Description Of Shares And Voting Rights.....................................33
Purchase, Redemption and Pricing of Shares....................................34
Net Asset Value Per Share...................................................34
Purchase of Shares..........................................................35
Redemption of Shares........................................................36
Exchange Privilege..........................................................38
Transfer Of Shares..........................................................38
Performance Calculations......................................................38
Total Return................................................................38
Yield.......................................................................39
Comparisons.................................................................39
Financial Statements..........................................................40
Glossary......................................................................40
Bond Ratings..................................................................41
Moody's Investors Service, Inc..............................................41
Standard & Poor's Ratings Services..........................................43
Duff & Phelps Credit Rating Co..............................................46
Fitch IBCA Ratings..........................................................47
Comparative Benchmarks........................................................48
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Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
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The portfolio currently intends to use the securities and investment
strategies listed below in seeking its objectives; however, it may at any
time invest in any of the investment strategies described in this SAI. This
SAI describes each of these investments/strategies and their risks. The
portfolio may not notify shareholders before employing new strategies,
unless it expects such strategies to become principal strategies. The
investments that are italicized are principal strategies and you can find
more information on these techniques in the prospectus of the portfolio.
You can find more information concerning the limits on the ability of the
portfolio to use these investments in "What Are the Investment Strategies
of the Portfolio?"
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Swaps.
. Forward currency exchange contracts.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
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Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities,
such as zero-coupon bonds, do not pay current interest and are purchased at
a discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities
include treasury notes, which have initial maturities of one to ten years
and treasury bonds, which have initial maturities of at least ten years and
certain types of mortgage-backed securities that are described under
"Mortgage-Backed Securities" and "Other Asset-Backed Securities." This SAI
discusses mortgage-backed treasury and agency securities in detail in the
section called "Mortgage-Backed Securities" and "Other Asset-Backed
Securities."
The full faith and credit of the U.S. government supports treasury
securities. Unlike treasury securities, the full faith and credit of the
U.S. government generally do not back agency securities. Agency securities
are typically supported in one of three ways:
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. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject to
the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the credit
risk is minimal. The U.S. government does not guarantee the net asset value of
the assets of the portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors, the
corporation promises to pay investors interest, and repay the principal amount
of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that various
governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities. Since
homeowners usually have the option of paying either part or all of the loan
balance before maturity, the effective maturity of a mortgage-backed security is
often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The adviser will consider such
insurance and guarantees and the creditworthiness of the issuers thereof in
determining whether a mortgage-related security meets its investment quality
standards. It is possible that the private insurers or guarantors will not meet
their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of portfolio
shares. To buy GNMA securities, the portfolio may have to pay a premium over the
maturity value of the underlying mortgages, which the portfolio may lose if
prepayment occurs.
Federal National Mortgage Association (FNMA)
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FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Securities issued by FNMA are agency securities, which
means FNMA, but not the U.S. government, guarantees their timely payment of
principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is owned
by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970 to
increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional mortgage loans. In addition to guaranteeing the
mortgage-related security, such issuers may service and/or have originated the
underlying mortgage loans. Pools created by these issuers generally offer a
higher rate of interest than pools created by GNMA, FNMA & FHLMC because they
are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing the portfolio to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, the portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-through.
In general, the collateral supporting these securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments
with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets, which raises the possibility
that recoveries on repossessed collateral may not be available to support
payments on these securities. For example, credit
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card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
allow debtors to reduce their balances by offsetting certain amounts owed on the
credit cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such receivables to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities. Due to
the quantity of vehicles involved and requirements under state laws, asset-
backed securities backed by automobile receivables may not have a proper
security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the pool
("credit support"). Delinquency or loss more than that anticipated or failure of
the credit support could adversely affect the return on an investment in such a
security.
The portfolio may also invest in residual interests in asset-backed securities,
which is the excess cash flow remaining after making required payments on the
securities and paying related administrative expenses. The amount of residual
cash flow resulting from a particular issue of asset-backed securities depends
in part on the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche of
CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, the portfolio may invest a portion of its assets
in the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a short-
term debt security has a maturity of one year or less.
Bank Obligations
The portfolio will only invest in a security issued by a commercial bank if the
bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
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. is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
The portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments are
unsecured and usually discounted. The portfolio may invest in commercial paper
rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not rated,
issued by a corporation having an outstanding unsecured debt issue rated A or
better by Moody's or by S&P. See "Bond Ratings" for a description of commercial
paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two classes
that receive different proportions of interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal, while the other class will receive most of the
interest and the remaining principal. In extreme cases, one class will receive
all of the interest ("interest only" or "IO" class) while the other class will
receive the entire principal sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage loans or mortgage-backed
securities. A rapid rate of principal payments may adversely affect the yield to
maturity of IOs. Slower than anticipated prepayments of principal may adversely
affect the yield to maturity of a PO. The yields and market risk of interest
only and principal only stripped mortgage-backed securities, respectively, may
be more volatile than those of other fixed income securities, including
traditional mortgage-backed securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which are
not typically associated with investing in domestic securities. See "FOREIGN
SECURITIES".
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Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold at
a discount from their face value. When held to maturity, their entire income,
which consists of accretion of discount, comes from the difference between the
issue price and their value at maturity. The amount of the discount rate varies
depending on factors including the time remaining until maturity, prevailing
interest rates, the security's liquidity and the issuer's credit quality. The
market value of zero coupon securities may exhibit greater price volatility than
ordinary debt securities because a stripped security will have a longer duration
than an ordinary debt security with the same maturity. The portfolio's
investments in pay-in-kind, delayed and zero coupon bonds may require it to sell
certain of its portfolio securities to generate sufficient cash to satisfy
certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by their
holder, typically a custodian bank or investment brokerage firm. Once the holder
of the security has stripped or separated corpus and coupons, it may sell each
component separately. The principal or corpus is then sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. The underlying
treasury security is held in book-entry form at the Federal Reserve Bank or, in
the case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the owners
thereof. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero coupon securities that
the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program known
as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," the portfolio can record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called when
interest rates are falling because the issuer can refinance at a lower rate,
similar to a homeowner refinancing a mortgage. The effective maturity of a debt
security is usually its nearest call date.
The portfolio that invests in debt securities has no real maturity. Instead, it
calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by the portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a debt
security, or the portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because it
takes into account the time value of cash flows generated over the life of a
debt security. Future interest payments and principal payments are discounted to
reflect their present value and then are multiplied by the number of years they
will be
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received to produce a value expressed in years -- the duration. Effective
duration takes into account call features and sinking fund prepayments that
may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each
1% reduction in interest rates at all maturity levels, the price of a
security is estimated to increase by 4%. An increase in rates by the same
magnitude is estimated to reduce the price of the security by 4%. By
knowing the yield and the effective duration of a debt security, one can
estimate total return based on an expectation of how much interest rates,
in general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
The portfolio may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing
of mortgage and asset-backed prepayments caused by the variations in
interest rates may also shorten or lengthen the average maturity of the
portfolio. If left unattended, drifts in the average maturity of the
portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the
expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the portfolio's average maturity to
lengthen unexpectedly due to a drop in mortgage prepayments. This would
increase the sensitivity of the portfolio to rising rates and its potential
for price declines. Extending the average life of a mortgage-backed
security increases the risk of depreciation due to future increases in
market interest rates. For these reasons, mortgage-backed securities may be
less effective than other types of U.S. government securities as a means of
"locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation
for assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer
higher yields than Treasury securities because their payment of interest
and complete repayment of principal is less certain. The credit rating or
financial condition of an issuer may affect the value of a debt security.
Generally, the lower the quality rating of a security, the greater the
risks that the issuer will fail to pay interest and return principal. To
compensate investors for taking on increased risk, issuers with lower
credit ratings usually offer their investors a higher "risk premium" in the
form of higher interest rates above comparable Treasuries securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an
adjustment to this "risk premium." Since an issuer's outstanding debt
carries a fixed coupon,
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adjustments to the risk premium must occur in the price, which effects the
yield to maturity of the bond. If an issuer defaults or becomes unable to
honor its financial obligations, the bond may lose some or all of its
value.
A security rated within the four highest rating categories by a rating
agency is called investment-grade because its issuer is more likely to pay
interest and repay principal than an issuer of a lower rated bond. Adverse
economic conditions or changing circumstances, however, may weaken the
capacity of the issuer to pay interest and repay principal. If a security
is not rated or is rated under a different system, the adviser may
determine that it is of investment-grade. The adviser may retain securities
that are downgraded, if it believes that keeping those securities is
warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit
worthy and/or highly leveraged (indebted) companies. A corporation may
issue a junk bond because of a corporate restructuring or other similar
event. Compared with investment-grade bonds, junk bonds carry a greater
degree of risk and are less likely to make payments of interest and
principal. Market developments and the financial and business condition of
the corporation issuing these securities influences their price and
liquidity more than changes in interest rates, when compared to investment-
grade debt securities. Insufficient liquidity in the junk bond market may
make it more difficult to dispose of junk bonds and may cause the portfolio
to experience sudden and substantial price declines. A lack of reliable,
objective data or market quotations may make it more difficult to value
junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolio currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's
opinion, not an absolute standard of quality, and they do not reflect an
evaluation of market risk. The section "Bond Ratings" contains further
information concerning the ratings of certain rating agencies and their
significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time the portfolio buys it. A
rating agency may change its credit ratings at any time. The adviser
monitors the rating of the security and will take appropriate actions if a
rating agency reduces the security's rating. The portfolio is not obligated
to dispose of securities whose issuers subsequently are in default or which
are downgraded below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner,
to reduce transaction costs or to remain fully invested. They may also
invest in derivatives to protect it from broad fluctuations in market
prices, interest rates or foreign currency exchange rates. Investing in
derivatives for these purposes is known as "hedging." When hedging is
successful, the portfolio will have offset any depreciation in the value of
its portfolio securities by the appreciation in the value of the derivative
position. Although techniques other than the sale and purchase of
derivatives could be used to control the exposure of the portfolio to
market fluctuations, the use of derivatives may be a more effective means
of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party
sells and the other party agrees to buy a specified amount of a financial
instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index,
interest rate, foreign exchange rate or other similar instrument. Agreeing
to buy the underlying financial information is called buying a futures
contract or taking a long position in the
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contract. Likewise, agreeing to sell the underlying financial instrument is
called selling a futures contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading and
regulated by the Commodity Futures Trading Commission, a federal agency. These
contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit "initial margin" with a futures broker, known as a futures commission
merchant, when they enter into the contract. Initial margin deposits are
typically equal to a percentage of the contract's value. After they open a
futures contract, the parties to the transaction must compare the purchase price
of the contract to its daily market value. If the value of the futures contract
changes in such a way that a party's position declines, that party must make
additional "variation margin" payments so that the margin payment is adequate.
On the other hand, the value of the contract may change in such a way that there
is excess margin on deposit, possibly entitling the party that has a gain to
receive all or a portion of this amount. This process is known as "marking to
the market."
Although the actual terms of a futures contract calls for the actual delivery of
and payment for the underlying security, in many cases the parties may close the
contract early by taking an opposite position in an identical contract. If the
sale price upon closing out the contract is less than the original purchase
price, the person closing out the contract will realize a loss. If the sale
price upon closing out the contract is more that the original purchase price,
the person closing out the contract will realize a gain. The opposite is also
true. If the purchase price upon closing out the contract is more than the
original sale price, the person closing out the contract will realize a loss. If
the purchase price upon closing out the contract is less than the original sale
price, the person closing out the contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the right
to sell the security). Options have various types of underlying instruments,
including specific securities, indices of securities prices, foreign currencies,
interest rates and futures contracts. Options may be traded on an exchange
(exchange-traded-options) or may be customized agreements between the parties
(over-the-counter or "OTC options"). Like futures, a financial intermediary,
known as a clearing corporation, financially backs exchange-traded options.
However, OTC options have no such intermediary and are subject to the risk that
the counter-party will not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as the
"option premium"). The portfolio may purchase put options to offset or hedge
against a decline in the market value of its securities ("protective puts") or
to benefit from a decline in the price of securities that it does not own. The
portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs. However, if the price
of the underlying instrument
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does not fall enough to offset the cost of purchasing the option, a put buyer
would lose the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in anticipation
of an increase in the market value of securities it owns or wants to buy. The
portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying instrument exceeded the exercise price plus the premium
paid and related transaction costs. Otherwise, the portfolio would realize
either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when the
portfolio writes a put option it assumes an obligation to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The portfolio may terminate
its position in an exchange-traded put option before exercise by buying an
option identical to the one it has written. Similarly, it may cancel an
over-the-counter option by entering into an offsetting transaction with the
counter-party to the option.
The portfolio could try to hedge against an increase in the value of securities
it would like to acquire by writing a put option on those securities. If
security prices rise, the portfolio would expect the put option to expire and
the premium it received to offset the increase in the security's value. If
security prices remain the same over time, the portfolio would hope to profit by
closing out the put option at a lower price. If security prices fall, the
portfolio may lose an amount of money equal to the difference between the value
of the security and the premium it received. Writing covered put options may
deprive the portfolio of the opportunity to profit from a decrease in the market
price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put
options, except that call writers expect to profit if prices remain the same or
fall. The portfolio could try to hedge against a decline in the value of
securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire and
the premium it received to offset the decline of the security's value. However,
the portfolio must be prepared to deliver the underlying instrument in return
for the strike price, which may deprive it of the opportunity to profit from an
increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
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. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price fluctuations
in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the option
by the holder, the contract market clearing house establishes a corresponding
short position for the writer of the option (in the case of a call option) or a
corresponding long position (in the case of a put option). If the option is
exercised, the parties will be subject to the futures contracts. In addition,
the writer of an option on a futures contract is subject to initial and
variation margin requirements on the option position. Options on futures
contracts are traded on the same contract market as the underlying futures
contract.
The buyer or seller of an option on a futures contract may terminate the option
early by purchasing or selling an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or sold.
The difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The portfolio may buy a put option on a
futures contract for the same reasons it would sell a futures contract. It also
may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures contracts,
such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If the
price of the futures contract at expiration were below the exercise price, the
portfolio would retain the option premium, which would offset, in part, any
decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if the market price declines, the portfolio
would pay more than the market price for the underlying instrument. The premium
received on the sale of the put option, less any transaction costs, would reduce
the net cost to the portfolio.
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Combined Positions
The portfolio may purchase and write options in combination with each other, or
in combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, the portfolio could
construct a combined position whose risk and return characteristics are similar
to selling a futures contract by purchasing a put option and writing a call
option on the same underlying instrument. Alternatively, the portfolio could
write a call option at one strike price and buy a call option at a lower price
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell a
specific amount of currency at a future date or date range at a specific price.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. Forward
foreign currency exchange contracts differ from foreign currency futures
contracts in certain respects. Unlike futures contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded only on exchanges regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency trader
who is a party to the original forward contract, as opposed to a commodities
exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the portfolio
against an adverse change in foreign currency values between the date a security
is purchased or sold and the date on which payment is made or received. Entering
into a forward contract for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction for a fixed amount of
U.S. dollars "locks in" the U.S. dollar price of the security. The portfolio may
also use forward contracts to purchase or sell a foreign currency when it
anticipates purchasing or selling securities denominated in foreign currency,
even if it has not yet selected the specific investments.
The portfolio may use forward contracts to hedge against a decline in the value
of existing investments denominated in foreign currency. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The portfolio could also hedge the position by selling
another currency expected to perform similarly to the currency in which the
portfolio's investment is denominated. This type of hedge, sometimes referred to
as a "proxy hedge," could offer advantages in terms of cost, yield, or
efficiency, but generally would not hedge currency exposure as effectively as a
direct hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities that the portfolio owns or intends to purchase or sell.
They simply establish a rate of exchange that one can achieve at some future
point in time. Additionally, these techniques tend to minimize the risk of loss
due to a decline in the value of the hedged currency and to limit any potential
gain that might result from the increase in value of such currency.
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The portfolio may enter into forward contracts to shift its investment exposure
from one currency into another. Such transactions may call for the delivery of
one foreign currency in exchange for another foreign currency, including
currencies in which its securities are not then denominated. This may include
shifting exposure from U.S. dollars to a foreign currency, or from one foreign
currency to another foreign currency. This type of strategy, sometimes known as
a "cross-hedge," will tend to reduce or eliminate exposure to the currency that
is sold, and increase exposure to the currency that is purchased. Cross-hedges
protect against losses resulting from a decline in the hedged currency, but will
cause the portfolio to assume the risk of fluctuations in the value of the
currency it purchases. Cross hedging transactions also involve the risk of
imperfect correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than the
amount of foreign currency it is obligated to deliver. Conversely, the portfolio
may have to sell on the spot market some of the foreign currency it received
upon the sale of a security if the market value of such security exceeds the
amount of foreign currency it is obligated to deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the cash
flows are based on agreed-upon prices, rates, indices, etc. The nominal amount
on which the cash flows are calculated is called the notional amount. Swaps are
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors, such as interest rates,
foreign currency rates, mortgage securities, corporate borrowing rates, security
prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate, currency,
or other factors that determine the amounts of payments due to and from the
portfolio. If a swap agreement calls for payments by the portfolio, the
portfolio must be prepared to make such payments when due. In addition, if the
counter-party's creditworthiness declined, the value of a swap agreement would
be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the prior
written consent of the other party. The portfolio may be able to eliminate its
exposure under a swap agreement either by assignment or by other disposition, or
by entering into an offsetting swap agreement with the same party or a similarly
creditworthy party. If the counter-party is unable to meet its obligations under
the contract, declares bankruptcy, defaults or becomes insolvent, the portfolio
may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according to
guidelines established by the SEC. If the portfolio enters into a swap agreement
on a net basis, it will segregate assets with a daily value at least equal to
the excess, if any, of the portfolio's accrued obligations under the swap
agreement over the accrued amount the portfolio is entitled to receive under the
agreement. If the portfolio enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount of the
portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay another
party the return on a stock, stock index or basket of stocks in return for a
specified interest rate. By entering into an equity index swap, for example, the
index receiver can gain exposure to stocks making up the index of securities
without actually purchasing those stocks. Equity index swaps involve not only
the risk associated with investment in the securities represented in the index,
but also the risk that the performance of such securities, including dividends,
will not exceed the return on the interest rate that the portfolio will be
committed to pay.
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Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of
interest rate cash flow on specified dates in the future. Some of the
different types of interest rate swaps are "fixed-for floating rate swaps,"
"termed basis swaps" and "index amortizing swaps." Fixed-for floating rate
swap involve the exchange of fixed interest rate cash flows for floating
rate cash flows. Termed basis swaps entail cash flows to both parties based
on floating interest rates, where the interest rate indices are different.
Index amortizing swaps are typically fixed-for floating swaps where the
notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the portfolio enters into a swap where it agrees
to exchange a floating rate of interest for a fixed rate of interest, the
portfolio may have to pay more money than it receives. Similarly, if the
portfolio enters into a swap where it agrees to exchange a fixed rate of
interest for a floating rate of interest, the portfolio may receive less
money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in
which one party agrees to make interest rate payments in one currency and
the other promises to make interest rate payments in another currency. A
portfolio may enter into a currency swap when it has one currency and
desires a different currency. Typically the interest rates that determine
the currency swap payments are fixed, although occasionally one or both
parties may pay a floating rate of interest. Unlike an interest rate swap,
however, the principal amounts are exchanged at the beginning of the
contract and returned at the end of the contract. Changes in foreign
exchange rates and changes in interest rates, as described above may
negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level. The seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these
transactions themselves entail certain other risks. For example,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance of the portfolio
than if it had not entered into any derivatives transactions. Derivatives
may magnify the portfolio's gains or losses, causing it to make or lose
substantially more than it invested.
When used for hedging purposes, increases in the value of the securities
the portfolio holds or intends to acquire should offset any losses incurred
with a derivative. Purchasing derivatives for purposes other than hedging
could expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends
on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant securities. In
the case of poor correlation, the price of the securities the portfolio is
hedging may not move in the same amount, or even in the same direction as
the hedging instrument. The adviser will try to minimize this risk by
investing only in those contracts whose behavior it expects to resemble the
portfolio securities it is trying to hedge. However, if the portfolio's
prediction of interest and currency rates, market value, volatility or
other economic factors is incorrect, the portfolio may lose money, or may
not make as much money as it expected.
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Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
. current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition of
daily price fluctuation limits or trading of an instrument stops; and
. differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on a
broad market index. Since narrower indices are made up of a smaller number of
securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of the
investments of the portfolio. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
portfolio against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the portfolio's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the portfolio's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange the
contract was initially traded. Although a portfolio intends to purchase options
and futures only where there appears to be an active market, there is no
guarantee that such a liquid market will exist. If there is no secondary market
for the contract, or the market is illiquid, the portfolio may not be able to
close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage firm
or clearing house or other occurrences may disrupt normal trading activity;
or
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. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Lev erage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can
change during a single trading day. Daily trading limits establish the
maximum amount that the price of a derivative may vary from the settlement
price of that derivative at the end of trading on the previous day. Once
the price of a derivative reaches this value, a portfolio may not trade
that derivative at a price beyond that limit. The daily limit governs only
price movements during a given day and does not limit potential gains or
losses. Derivative prices have occasionally moved to the daily limit for
several consecutive trading days, preventing prompt liquidation of the
derivative.
Because of the low margin deposits required upon the opening of a
derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative
may result in an immediate and substantial loss (as well as gain) to the
portfolio and it may lose more than it originally invested in the
derivative.
If the price of a futures contract changes adversely, the portfolio may
have to sell securities at a time when it is disadvantageous to do so to
meet its minimum daily margin requirement. The portfolio may lose its
margin deposits if a broker-dealer with whom it has an open futures
contract or related option becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
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Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other respects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a
fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits
of owning a company, such investors must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
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. Changes in financial market conditions that are relatively unrelated to
the company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the over-the-
counter market and might not be traded in volumes typical of securities
traded on a national securities exchange. Thus, the securities of small and
medium capitalization companies are likely to be less liquid, and subject
to more abrupt or erratic market movements, than securities of larger, more
established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities. EDRs are
similar to ADRs, except that they are typically issued by European Banks or
trust companies.
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Emerging Markets
An "emerging country" is generally a country that the International Bank
for Reconstruction and Development (World Bank) and the International
Finance Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. Investments in these investment funds are subject
to the provisions of the 1940 Act. Shareholders of a UAM Fund that invests
in such investment funds will bear not only their proportionate share of
the expenses of the UAM Fund (including operating expenses and the fees of
the adviser), but also will bear indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may trade
at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect an investment
in foreign securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt;
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and
economic conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other
countries or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit the portfolio's ability to
invest in a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may restrict
the ability of foreign investors to repatriate their investment income
and capital gains.
19
<PAGE>
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter (OTC)
market located outside of the United States will be the best available market
for foreign securities. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as the markets in the United
States. Foreign stocks markets tend to differ from those in the United States in
a number of ways:
. They are generally not as developed or efficient as, and more volatile, than
those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set minimum
rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the United
States dollar will result in a corresponding change in value of securities
denominated in that currency. Some of the factors that may impair the
investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States dollars
and vice versa;
. Complex political and economic factors may significantly affect the values of
various currencies, including United States dollars, and their exchange
rates;
. Government intervention may increase risks involved in purchasing or selling
foreign currency options, forward contracts and futures contracts, since
exchange rates may not be free to fluctuate in response to other market
forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million) where
rates may be less favorable; and
20
<PAGE>
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially making
prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002. At
the end of that period, use of the Euro will be compulsory and countries in the
EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose whether
to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in Euros
and redenominating many investments, currency balances and transfer mechanisms
into Euros. The portfolio also anticipates pricing, trading, settling and
valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the portfolio expects the conversion to the
Euro to impact investments in countries that adopt the Euro in all aspects of
the investment process, including trading, foreign exchange, payments,
settlements, cash accounts, custody and accounting. Some of the uncertainties
surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
21
<PAGE>
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
The portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by the portfolio. Like other shareholders, the
portfolio would pay its proportionate share of those fees. Consequently,
shareholders of the portfolio would pay not only the management fees of the
portfolio, but also the management fees of the investment company in which
the portfolio invests. The portfolio may invest up to 10% of its total
assets in the securities of other investment companies, but may not invest
more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding securities of any one
investment company.
The SEC has granted an order that allows the portfolio to invest the
greater of 5% of its total assets or $2.5 million in the UAM DSI Money
Market Portfolio, provided that the investment is:
. For cash management purposes;
. Consistent with the portfolio's investment policies and restrictions;
and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The portfolio will bear expenses of the UAM DSI Money Market Portfolio on
the same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolio normally uses repurchase agreements to
earn income on assets that are not invested.
When the portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying
security (i.e., it will require the borrower to "mark to the market" on
a daily basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the portfolio's right to sell
the security may be restricted. In addition, the value of the security
might decline before the portfolio can sell it and the portfolio might
incur expenses in enforcing its rights.
RESTRICTED SECURITIES
- --------------------------------------------------------------------------------
The portfolio may purchase restricted securities that are not registered
for sale to the general public but which are eligible for resale to
qualified institutional investors under Rule 144A of the Securities Act of
1933. Under the
22
<PAGE>
supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the
portfolio or less than what may be considered the fair value of such
securities.
SECURITIES LENDING
- --------------------------------------------------------------------------------
The portfolio may lend a portion of its total assets to broker- dealers or
other financial institutions. It may then reinvest the collateral it
receives in short-term securities and money market funds. When the
portfolio lends its securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market
value of the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit
issued by a domestic U.S. bank or securities issued or guaranteed by
the U. S. government;
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities the portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. The portfolio will only enter
into these types of transactions with the intention of actually acquiring
the securities, but may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable
price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the
23
<PAGE>
market value of the security may be more or less than the purchase price.
The yield available in the market when the delivery takes place also may be
higher than those obtained in the transaction itself. Because the portfolio
does not pay for the security until the delivery date, these risks are in
addition to the risks associated with its other investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolio
The portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, the
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following investment limitations are fundamental, which means the
portfolio cannot change them without approval by the vote of a majority of
the outstanding voting securities of the portfolio, as defined by the 1940
Act. The portfolio will not:
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3% of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. Invest more than 25% of its total assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies when the portfolio adopts a temporary defensive position.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the portfolio from (1)
making any permitted borrowings, mortgages or pledges, or (2) entering
into options, futures or repurchase transactions.
. Make loans, except by purchasing debt securities in accordance with
its investment objective and policies, or entering into repurchase
agreements, or by lending its portfolio securities to banks, brokers,
dealers and other financial institutions so long as the loans are not
inconsistent with the 1940 Act and the rules and regulations or
interpretations of the SEC.
. Purchase or sell real estate, although it may purchase and sell
securities of companies which deal in real estate and may purchase and
sell securities which are secured by interests in real estate.
. Underwrite the securities of other issuers.
NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the portfolio
may change them without shareholder approval. The portfolio will not:
. With respect to 50% of its assets, invest more than 5% of its total
assets at the time of purchase in securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any of its agencies or
instrumentalities).
. With respect to 50% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
24
<PAGE>
. Invest in stock or bond futures and/or options on futures unless (1)
not more than 5% of the portfolio's assets are required as deposit to
secure obligations under such futures and/or options on futures
contracts provided, however, that in the case of an option that is in-
the-money at the time of purchase, the in-the-money amount may be
excluded in computing such 5% and (2) not more than 20% of the
portfolio's assets are invested in stock or bond futures and options
on futures.
. Invest more than 5% of its assets at the time of purchase in the
securities of companies that have (with predecessors) a continuous
operating history of less than 3 years.
. Invest more than an aggregate of 15% of the net assets of the
portfolio, determined at the time of investment, in securities subject
to legal or contractual restrictions on resale or securities for which
there are no readily available markets, including repurchase
agreements having maturities of more than seven days. Swap
transactions may be considered illiquid securities.
. Invest, not inconsistent with the aforementioned limit, more than 25%
of its total assets in non-publically traded securities, including
securities that are not registered under the Securities Act of 1933
but that can be offered and sold to qualified institutional buyers
under Rule 144A under such Act.
. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total
assets.
. Purchase more than 10% of its total assets, measured at the time of
investment, in lower quality debt securities, otherwise known as "junk
bonds".
. Purchase or sell OTC options or OTC options on futures contracts, if,
as a result of such transaction, the aggregate sum of the market value
of the OTC option, the market value of the underlying securities
covered by OTC call options currently outstanding, and margin deposits
on the existing OTC options exceed 15% of the net assets of the
portfolio, taken at market value, together with all other assets of
the portfolio which are illiquid or are not otherwise readily
marketable. However, OTC options sold by the portfolio to a primary
U.S. government securities dealer recognized by the Federal Reserve
Bank of New York and the Portfolio has the unconditional contractual
right to purchase such OTC option from the dealer at the predetermined
price, than the portfolio will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money". The repurchase price
with the primary dealer is typically a formula price which is
generally based on a multiple of the premium received for the option,
plus the amount by which the option is "in-the-money".
. Purchase on margin or sell short, except as permitted herein.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to
execute policies the board has formulated. The Fund pays each board member
who is not also an officer or affiliated person (independent board member)
a $150 quarterly retainer fee per active portfolio and a $2,000 meeting
fee. In addition, the Fund reimburses each independent board member for
travel and other expenses incurred while attending board meetings. The
$2,000 meeting fee and expense reimbursements are aggregated for all of the
board members and allocated proportionately among the portfolios of the UAM
Funds Complex. The Fund does not pay board members that are affiliated with
the fund for their services as board members. UAM, its affiliates or SEI
pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as
25
<PAGE>
that term is defined in the 1940 Act. Mr. English does have an investment
advisory relationship with Investment Counselors of Maryland, an investment
adviser to one of the portfolios in the UAM Funds Complex. However, the Fund
does not believe that the relationship is a material business relationship, and,
therefore, does not consider him to be an "interested person" of the Fund. If
these circumstances change, the Board will determine whether any action is
required to change the composition of the Board.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
From the Fund Complex as of
Name, Address, Position Principal Occupations During the as of October October 31,
DOB with Fund Past 5 years 31, 1999 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management $7,137 $10,625
College Road -- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company, Inc.; President of Bennett Management
1/26/29 Company from 1988 to 1993.
- --------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund since $7,137 $10,625
1250 24/th/ St., NW Member January 1999; Vice President for Finance and
Washington, DC 20037 Administration and Treasurer of Radcliffe College
8/14/51 from 1991 to 1999.
- --------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief Administrative $7,137 $10,625
100 King Street West Member Officer of Philip Services Corp.; Formerly, a Partner
P.O. Box 2440, LCD-1 in the Philadelphia office of the law firm Dechert
Hamilton Ontario, Price & Rhoads and a Director of Hofler Corp.
Canada L8N-4J6
4/21/42
- --------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of $7,137 $10,625
16 West Madison Street Member Broventure Company, Inc.; Chairman of the Board
Baltimore, MD 21201 of Chektec Corporation and Cyber Scientific, Inc.
8/5/48
- --------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, Inc. since 0 0
211 Congress Street Member March 1999; Vice President UAM Trust Company
Boston, MA 02110 since January 1996; Principal of UAM Fund
2/24/53 Distributors, Inc. since December 1995; Vice
President of UAM Investment Services, Inc. from
January 1996 to March 1999 and a Director and
Chief Operating Officer of CSFirst Boston
Investment Management from 1993-1995.
- --------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director 0 0
One International Place Member; of United Asset Management Corporation;
Boston, MA 02110 President Director, Partner or Trustee of each of the
3/21/35 and Investment Companies of the Eaton Vance Group
Chairman of Mutual Funds.
- --------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of Dewey 0 0
One Financial Center Member Square Investors Corporation since 1988; Director
Boston, MA 02111 and Chief Executive Officer of H.T. Investors, Inc.,
7/1/43 formerly a subsidiary of Dewey Square.
- --------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial 0 0
One International Place President Officer of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- --------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of 0 0
211 Congress Street the Fidelity Group of Mutual Funds from 1991
Boston, MA 02110 to 1995; held various other offices with Fidelity
7/4/51 Investments from November 1990 to March 1995.
- --------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase Global
Boston, MA 02110 Fund Services Company from 1995 to 1996; Senior
9/18/63 Manager of Deloitte & Touche LLP from 1985 to 1995,
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
From the Fund Complex as of
Name, Address, Position Principal Occupations During the as of October October 31,
DOB with Fund Past 5 years 31, 1999 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI 0 0
SEI Investments Treasurer Investments; Senior Manager at Arthur Andersen
One Freedom Valley Rd. prior to 1994.
Oaks, PA 19456
12/17/63
</TABLE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of record or
beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned
- --------------------------------------------------------------------------------
<S> <C>
Stanford Management Company 27.79%
2770 Sandhill Road
Menlo Park, CA 94025-7070
- --------------------------------------------------------------------------------
RJR Reynolds Tobacco CO 29.09%
Defined Benefit Master Trust
4 Chase Metrotech Center #18
Brooklyn, NY 11245-0005
- --------------------------------------------------------------------------------
Charles Schwab & CO INC 17.55%
Reinvest Account
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4323
- --------------------------------------------------------------------------------
University of Guelph 6.70%
FBO Dale Lockie
Pension Investments
University Centre LVL 5
Guelph, Ontario
Canada, NIG 2WI
- --------------------------------------------------------------------------------
Nabisco Inc. 6.49%
Defined Benefit Master Trust
4 Chase Metrotech Center #18
Brooklyn, NY 11245-0005
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares of
a portfolio may be presumed to "control" (as that term is defined in the 1940
Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1, 2000,
the directors and officers of the Fund owned less than 1% of the outstanding
shares of the portfolio.
Investment Advisory and Other Services
INVESTMENT ADVISER
27
<PAGE>
Acadian Asset Management, Inc., a Massachusetts corporation located at Two
International Place, Boston, Massachusetts 02110, is the investment adviser to
the portfolio. The adviser manages and supervises the investment of the
portfolio's assets on a discretionary basis. The adviser, an affiliate of United
Asset Management Corporation, has provided investment management services to
corporations, pension and profit-sharing plans, 401(k) and thrift plans, trusts,
estates and other institutions and individuals since 1986.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms engaged
primarily in institutional investment management. Since its first acquisition in
August 1983, UAM has acquired or organized more than 50 UAM Affiliated Firms.
UAM believes that permitting UAM Affiliated Firms to retain control over their
investment advisory decisions is necessary to allow them to continue to provide
investment management services that are intended to meet the particular needs of
their respective clients. Accordingly, after acquisition by UAM, UAM Affiliated
Firms continue to operate under their own firm name, with their own leadership
and individual investment philosophy and approach. Each UAM Affiliated Firm
manages its own business independently on a day-to-day basis. Investment
strategies employed and securities selected by UAM Affiliated Firms are
separately chosen by each of them. Several UAM Affiliated Firms also act as
investment advisers to separate series or portfolios of the UAM Funds Complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of the Investment
Advisory Agreement. The Fund has filed the Investment Advisory Agreement with
the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
The adviser:
. Manages the investment and reinvestment of the portfolio's assets;
. Continuously reviews, supervises and administers the investment program of
the portfolio; and
. Determines what portion of the portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on the
part of the adviser in the performance of its obligations and duties under the
Investment Advisory Agreement, (2) reckless disregard by the adviser of its
obligations and duties under the Investment Advisory Agreement, or (3) a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
The Investment Advisory Agreement continues in effect for periods of one year so
long as such continuance is specifically approved at least annually by a:
28
<PAGE>
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time, without
the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the portfolio pays its adviser a fee equal to of the average
daily net assets of the portfolio. Due to the effect of fee waivers by the
adviser, the actual percentage of average net assets that the portfolio pays in
any given year may be different from the rate set forth in its contract with the
adviser. For the last three fiscal years, the portfolio paid the following in
management fees to the adviser:
Investment Advisory Fees Paid
- --------------------------------------------------------------------------------
Acadian Emerging Markets Portfolio $1,274,940
1999
- --------------------------------------------------------------------------------
1998 $ 812,228
- --------------------------------------------------------------------------------
1997 $ 862,391
DISTRIBUTOR
UAMFDI is the Fund's distributor. The Fund offers its shares continuously. While
UAMFDI will use its best efforts to sell shares of the Fund, it is not obligated
to sell any particular amount of shares. UAMFDI receives no compensation for its
services. UAMFDI, an affiliate of UAM, is located at 211 Congress Street,
Boston, Massachusetts 02110.
SHAREHOLDER SERVICING ARRANGEMENTS
UAM and each of its affiliates, may, at its own expense, compensate a Service
Agent or other person for marketing, shareholder servicing, record-keeping
and/or other services performed with respect to the Fund or the portfolio. The
person making such payments may do so out of its revenues, its profits or any
other source available to it. Such services arrangements, when in effect, are
made generally available to all qualified service providers. The adviser may
also compensate its affiliated companies for referring investors to the
portfolio.
29
<PAGE>
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend
disbursing and transfer agent services for the Fund. UAMFSI, an affiliate
of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if
the Board specifically approves such continuance every year. The Board or
UAMFSI may terminate the Fund Administration Agreement, without penalty, on
not less than ninety (90) days' written notice. The Fund Administration
Agreement automatically terminates upon its assignment by UAMFSI without
the prior written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in
performing its duties under the Fund Administration Agreement. Such people
may be officers and employees who are employed by both UAMFSI and the Fund.
UAMFSI will pay such people for such employment. The Fund will not incur
any obligations with respect to such people.
30
<PAGE>
Administration and Transfer Agency Services Fees
The portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, the portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio
at the following rates:
Annual Rate
-----------------------------------------------------------------
Acadian Emerging Markets Portfolio 0.063%
2. The portfolio also pays a fee to UAMFSI for sub-administration and
other services provided by SEI. The fee, which UAMFSI pays to SEI, is
calculated at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM
Funds Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its
services as transfer agent and dividend-disbursing agent equal to
$10,500 for the first operational class and $10,500 for each
additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational
class and $2,500 for each additional class.
For the last three fiscal years the portfolio paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acadian Emerging Markets Portfolio $89,112 $102,354 $191,466
1999
- -----------------------------------------------------------------------------------------------------------------
1998 $31,634 $ 82,333 $113,967
- -----------------------------------------------------------------------------------------------------------------
1997 $51,734 $ 89,053 $140,787
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York
11245, provides for the custody of the Fund's assets pursuant to the terms
of a custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Fund.
Brokerage Allocation and Other Practices
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
The Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the portfolio. The Investment Agreement also directs the
adviser to use
31
<PAGE>
its best efforts to obtain the best execution with respect to all
transactions for the portfolio. The adviser may select brokers based on
research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and
not instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes
it is reasonable to do so in light of the value of the research,
statistical, and pricing services provided by the broker effecting the
transaction.
It is not the practice of the Fund to allocate brokerage or effect
principal transactions with dealers based on sales of shares that a broker-
dealer firm makes. However, the Fund may place trades with qualified
broker-dealers who recommend the Fund or who act as agents in the purchase
of Fund shares for their clients.
SIMULTANEOUS TRANSACTIONS
- -------------------------------------------------------------------------------
The adviser makes investment decisions for the portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the
same security for more than one client. The adviser strives to allocate
such transactions among its clients, including the portfolio, in a fair and
reasonable manner. Although there is no specified formula for allocating
such transactions, the Fund's governing board periodically reviews the
various allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect
a dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, the portfolio
will not pay brokerage commissions for such purchases. When a debt security
is bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When the portfolio
executes transactions in the over-the-counter market, it will deal with
primary market makers unless prices that are more favorable are otherwise
obtainable.
Commissions Paid
For the last three fiscal years, the portfolio paid the following in
brokerage commissions:
Brokerage Commissions
--------------------------------------------------------------------------
Acadian Emerging Markets Portfolio $574,983
1999
--------------------------------------------------------------------------
1998 $298,630
--------------------------------------------------------------------------
1997 $184,776
32
<PAGE>
Capital Stock and Other Securities
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its
name to "UAM Funds, Inc." The Fund's principal executive office is located
at 211 Congress Street, Boston, MA 02110; however, shareholders should
direct all correspondence to the address listed on the cover of this SAI.
The Fund is an open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing
board to issue three billion shares of common stock, with a $.001 par
value. The governing board has the power to create and designate one or
more series (portfolios) or classes of shares of common stock and to
classify or reclassify any unissued shares at any time and without
shareholder approval. When issued and paid for, the shares of each series
and class of the Fund are fully paid and nonassessable, and have no pre-
emptive rights or preference as to conversion, exchange, dividends,
retirement or other features.
The shares of each series and class have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of members of the governing board can elect all of the members if
they choose to do so. On each matter submitted to a vote of the
shareholders, a shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing
in his name on the books of the Fund. Shares of all classes will vote
together as a single class except when otherwise required by law or as
determined by the members of the Fund's governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. The liquidation of any
portfolio or class thereof may be authorized at any time by vote of a
majority of the members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are
identical in all respects. Unlike Institutional and Adviser Class Shares,
Institutional Service Class Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures. The Adviser Class Shares impose a sales load on
purchases. The classes also have different exchange privileges. The net
income attributable to Institutional Service Class Shares and the dividends
payable on Institutional Service Class Shares will be reduced by the amount
of the shareholder servicing and distribution fees; accordingly, the net
asset value of the Institutional Service Class Shares will be reduced by
such amount to the extent a portfolio has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
33
<PAGE>
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
FEDERAL TAXES
The portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income
to shareholders each year so that the portfolio itself generally will be
relieved of federal income and excise taxes. If the portfolio were to fail
to so qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would
be taxed as if they received ordinary dividends, although corporate
shareholders could be eligible for the dividends received deduction.
The portfolio's dividends that are paid to its corporate shareholders and
are attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to
the NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result
by the total number of shares outstanding. For purposes of this
calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on
the NYSE every day the NYSE is open for trading. The NYSE usually closes at
4:00 p.m. The NYSE is closed on the following days: New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
34
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the Fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "How the Fund Values it Assets"
at the next determination of net asset value after acceptance. The Fund
will issue shares of the portfolio at the NAV of the portfolio determined
as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
35
<PAGE>
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and
that there are no restrictions on their resale imposed by the 1933 Act
or otherwise;
. All dividends, interest, subscription, or other rights pertaining to
such securities become the property of the portfolio and are delivered
to the fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all
securities of the same issuer held by the portfolio cannot exceed 5%
of the net assets of the portfolio. This condition does not apply to
U.S. government securities.
Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such
exchanges should contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you
paid for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of
shares or dollar amount the shareholder wishes to redeem signed by all
registered owners of the shares in the exact names in which they are
registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts,
guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to
receive redemption proceeds. To change an account in this manner, you
must submit a written request signed by each shareholder, with each
signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable
for any losses if they fail to do so. These procedures include requiring
the investor to provide certain personal identification at the time an
account is opened and before effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions of such transaction requests. The Fund or UAMSSC may be liable
for any losses due to unauthorized or fraudulent telephone instructions if
the Fund or the UAMSSC does not employ the procedures described above.
Neither the Fund nor the UAMSSC will be responsible for any loss,
liability, cost or expense for following instructions received by telephone
that it reasonably believes to be genuine
36
<PAGE>
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or partly
in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of cash
in conformity with applicable rules of the SEC. Investors may incur brokerage
charges on the sale of portfolio securities received in payment of redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth under
"Valuation of Shares." A redeeming shareholder would normally incur brokerage
expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person who
has authorized a redemption from your account and to protect your account, the
Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that participates
in a signature guarantee program. Eligible guarantor institutions include banks,
brokers, dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. You can get
a complete definition of eligible guarantor institutions by calling 1-877-826-
5465. Broker-dealers guaranteeing signatures must be a member of a clearing
corporation or maintain net capital of at least $100,000. Credit unions must be
authorized to issue signature guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
37
<PAGE>
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
Performance Calculations
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC.
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in the portfolio over
a given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a
stated period. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period.
The fund calculates the average annual total return of the portfolio by
finding the average annual compounded rates of return over one, five and
ten-year periods that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each one, five and ten-
year period and the deduction of all applicable Fund expenses on an annual
basis. Since Institutional Service Class Shares bear additional service and
distribution expenses, their average annual total return will generally be
lower than that of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
38
<PAGE>
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
Set forth in the table below are the portfolio's average annual returns for
the one-year period and the five-year period ended October 31,
1999 and the shorter of the ten-year period ended October 30,
1999 or the period from the portfolio's inception date through
October 31, 1999.
<TABLE>
<CAPTION>
Shorter of
10 Years or Since
One Year Five Years Inception Inception Date
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Acadian Emerging Markets Portfolio 41.49% - 5.73% 0.72% 6/17/93
</TABLE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in the portfolio over
a given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds.
As this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during
the base period. Since Institutional Service Class shares bear additional
service and distribution expenses, their yield will generally be lower than
that of the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
COMPARISONS
- --------------------------------------------------------------------------------
The portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data
reported in financial and industry publications, and various indices as
further described in this SAI. This information may also be included in
sales literature and advertising.
39
<PAGE>
To help investors better evaluate how an investment in the portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various
financial publications. Advertisements may also compare performance (as
calculated above) to performance as reported by other investments, indices
and averages. Please see "Comparative Benchmarks" for publications, indices
and averages that may be used.
In assessing such comparisons of performance, an investor should keep in
mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not
be identical to the formula used by the portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that the portfolio will continue
this performance as compared to such other averages.
Financial Statements
The following documents are included in the portfolio's October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolio's Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolio's Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's
sub-administrator.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
40
<PAGE>
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 Act, the 1940 Act and
the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
Bond Ratings
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well-
maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and
asset protection are, nevertheless, expected to be maintained at
adequate levels.
baa An issue that which is rated "baa" is considered to be a medium--
grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of
eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
41
<PAGE>
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each rating
minus (-) classification: the modifier 1 indicates that the security ranks
in the higher end of its generic rating catefory; the modifier 2
indicates a mid-range ranking and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt-edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals) Bonds for
which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operating experience, (c)
rentals that begin when facilities are completed, or (d) payments
to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
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<PAGE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institution) have a
Prime-1 superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics:
. Leading market positions in well-established industries.
. Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
. Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligation.
The effect of industry characteristics and market compositions
may be more pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
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<PAGE>
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations
are typically rated lower than senior obligations, to reflect the lower
priority in bankruptcy, as noted above. Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to meet
its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
Obligations rated 'BB', 'B', 'CCC' , 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposures to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment,
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on
the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated 'C' is
CURENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been
filed or similar action taken, but payments on this obligation
are being continued. A 'C' will also be assigned to a preferred
stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
<PAGE>
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligation linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet
its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poors' believes that such payments will be made during such grace period.
The 'D' rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation are
jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identity those instances where sovereign risks make them different for the same
issuer.
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<PAGE>
DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of economic
conditions.
A+/A/A- Protection factors are average but adequate. However, risk factors
are more variable in periods of greater economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient
BBB- for prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors fluctuate
according to industry conditions. Overall quality may move up or
down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating
within this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-
free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
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<PAGE>
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify issues
as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not sufficient
to insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. 'AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for
timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions
than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment
of financial commitments is considered adequate, but adverse
changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment-grade
category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be
met. Securities rated in this category are not investment grade.
B Highly speculative. 'B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable
business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A 'CC' rating
indicates that default of some kind appears probable. 'C' ratings
signal imminent default.
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<PAGE>
DDD,DD,D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated
with any precision, the following serve as general guidelines.
"DDD" obligations have the highest potential for recovery, around
90%-100% of outstanding amounts and accrued interest. "D"
indicates potential recoveries in the range of 50%-90%, and "D"
the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of
their obligations. Entities rated "DDD" have the highest prospect
for resumption of performance or continued operation with or
without a formal reorganization process. Entities rated "DD" and
"D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities
rated "D" have a poor prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for timely
payment of financial commitments; may have an added "+" to denote
any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as
great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' long-term rating
category, to categories below 'CCC', or to short-term ratings other than 'F1'.
'NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Comparative Benchmarks
(alphabetically)
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CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of
Labor Statistics -- a statistical measure of change, over time in the price of
goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange. It has been a widely followed indicator of the stock
market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World, Forbes,
Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global Investor,
Investor's Daily, Lipper, Inc., Morningstar, Inc., The New York Times, Personal
Investor, The Wall Street Journal and Weisenberger Investment Companies
Service -- publications that rate fund performance over specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch & Co.,
Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-weighted
index maintained by the International Finance Corporation. This index consists
of over 890 companies in 26 emerging equity markets, and is designed to measure
more precisely the returns portfolio managers might receive from investment in
emerging markets equity securities by focusing on companies and markets that are
legally and practically accessible to foreign investors.
Lehman Brothers Indices:
- ------------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues, agency
issues, corporate bond issues and mortgage backed securities. It includes fixed
rate issuers of investment grade (BBB) or higher, with maturities of at least
one year and outstanding par values of at least $100 million for U.S. government
issues and $25 million for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate debt.
Also included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued debt
of U.S. government agencies and quasi-federal corporations, and corporate debt
guaranteed by the U.S. government). In addition to the aggregate index, sub-
indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of at
least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded during
49
<PAGE>
the month is held in the index until month end and then removed. All returns are
market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar denominated,
noncovertible, have at least one year remaining to maturity and an outstanding
par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers Government
Bond Index (intermediate-term sub-index) and four corporate bond sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Associateion (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
- -------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with 12
indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual fund
classification method in which peer comparisons are based upon characteristics
of the specific stocks in the underlying funds, rather than upon a broader
investment objective stated in a prospectus. Certain of Lipper, Inc.'s
classifications for general equity funds' investment objectives were changed
while other equity objectives remain unchanged. Changing investment objectives
include Capital Appreciation Funds, Growth Funds, Mid-Cap Funds, Small-Cap
Funds, Micro-Cap Funds, Growth & Income Funds, and Equity Income Funds.
Unchanged investment objectives include Sector Equity Funds, World Equity Funds,
Mixed Equity Funds, and certain other funds including all Fixed Income Funds and
S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group; 2)
number of component funds remains the same (30); 3) component funds are defined
annually; 4) can be linked historically; and 5) are used as a benchmark for fund
performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but are
not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt issues
(BBB or higher) with dollar-weighted average maturities of one to five years or
less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which seek
relatively high current income and growth of income through investing 60% or
more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by prospectus
or portfolio practice invest primarily in companies with market capitalizations
less than $1 billion at the time of purchase. (Equity category)
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Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to grow
significantly faster than the earnings of the stocks represented in the major
unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestments of all distributions, exclusive of any
applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities from
1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market value-
weighted averages of the performance of over 900 securities listed on the stock
exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price, yield,
risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
- ----------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of the
1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000 Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000 Index.
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<PAGE>
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell Top
200 companies with higher price-to-book ratios and higher forecasted growth
values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell Top
200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are representative
of a diversified, investment grade portfolio of contracts issued by credit
worthy insurance companies. The index is unmanaged and does not reflect any
transaction costs. Direct investment in the index is not possible.
Standard & Poor's U.S. Indices:
- -------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10 economic
sectors aggregated from 23 industry groups, 59 industries, and 123 sub-
industries covering almost 6,000 companies globally. The new classification
standard will be used with all of their respective indices. Features of the new
classification include 10 economic sectors, rather than the 11 S&P currently
uses. Sector and industry gradations are less severe. Rather than jumping from
11 sectors to 115 industries under the former S&P system, the new system
progresses from 10 sectors through 23 industry groups, 50 industries and 123
sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market performance.
It is used by 97% of U.S. money managers and pension plan sponsors. More than $1
trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market size,
liquidity, and industry group representation. It is a market-value weighted
index with each stock affecting the index in proportion to its market value.
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It is used by over 95% of U.S. managers and pension plan sponsors. More than $25
billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The index
is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred benchmark
for both active and passive management due to its low turnover and greater
liquidity. Approximately $8 billion is indexed to the S&P SmallCap 600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted index
is made up of 100 major, blue chip stocks across diverse industry groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the securities
in the S&P 500 Index according to price-to-book ratio. The Value index contains
the companies with the lower price-to-book ratios; while the companies with the
higher price-to-book ratios are contained in the Growth index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80% of
the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the largest
utility companies listed on the New York Stock Exchange, including 23 electric
power companies, 12 natural gas distributors and 8 telephone companies.
Standard & Poor's CANADA Indices:
- ---------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size company
segment of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
- ---------------------------------
S&P Global 1200 Index - aims to provide investors with an investable portfolio.
This index, which covers 29 countries and consists of seven regional components,
offers global investors an easily accessible, tradable set of stocks and
particularly suits the new generation of index products, such as exchange-traded
funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as the
new Canadian large cap benchmark and will ultimately replace the Toronto 35 and
the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each major
sector of the Tokyo market. It is designed specifically to give portfolio
managers and derivative traders an index that is broad enough to provide
representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan --are
represented in the new index.
S&P Latin America 40 Index - part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
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S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad enough
to provide representation of the market, but narrow enough to ensure liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization) of
the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all treasury
bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return equivalent
yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small company
stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used by
the institutional investment community as a broad measure of the performance of
public real estate equity for asset allocation and performance comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the Wilshire
Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The C & B Portfolios
C & B Equity Portfolio
C & B Equity Portfolio for Taxable Investors
C & B Mid Cap Equity Portfolio
C & B Balanced Portfolio
Institutional Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the portfolios dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address listed
above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments...................................... 1
What Investment Strategies May the Portfolios Use?...................... 1
Debt Securities......................................................... 2
Derivatives............................................................. 9
Equity Securities....................................................... 17
Foreign Securities...................................................... 18
Investment Companies.................................................... 22
Repurchase Agreements.................................................... 22
Restricted Securities.................................................... 23
Securities Lending....................................................... 23
When Issued Transactions................................................. 23
Investment Policies of the Portfolios...................................... 24
Fundamental Policies..................................................... 24
Management Of The Fund..................................................... 25
Principal Shareholders..................................................... 27
Investment Advisory and Other Services..................................... 28
Investment Adviser....................................................... 28
Distributor.............................................................. 30
Shareholder Servicing Arrangements....................................... 30
Administrative Services.................................................. 30
Custodian................................................................ 32
Independent Accountants.................................................. 32
Brokerage Allocation and Other Practices................................... 32
Selection of Brokers..................................................... 32
Simultaneous Transactions................................................ 33
Brokerage Commissions.................................................... 33
Capital Stock and Other Securities......................................... 34
Description Of Shares And Voting Rights.................................. 34
Purchase, Redemption and Pricing of Shares................................. 35
Net Asset Value Per Share................................................ 35
Purchase of Shares....................................................... 36
Redemption of Shares..................................................... 37
Exchange Privilege....................................................... 39
Transfer Of Shares....................................................... 39
Performance Calculations................................................... 39
Total Return............................................................. 39
Yield.................................................................... 40
Comparisons.............................................................. 40
Financial Statements....................................................... 41
Glossary................................................................... 41
Bond Ratings............................................................... 42
Moody's Investors Service, Inc........................................... 42
Standard & Poor's Ratings Services....................................... 44
Duff & Phelps Credit Rating Co........................................... 47
Fitch IBCA Ratings....................................................... 48
Comparative Benchmarks..................................................... 50
</TABLE>
<PAGE>
Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIOS USE?
- --------------------------------------------------------------------------------
The portfolios currently intend to use the securities and investment
strategies listed below in seeking their objectives; however, they may at any
time invest in any of the investment strategies described in this SAI. This
SAI describes each of these investments/strategies and their risks. A
portfolio may not notify shareholders before employing new strategies, unless
it expects such strategies to become principal strategies. The investments
that are italicized are principal strategies and you can find more
information on these techniques in the prospectus of the portfolio. You can
find more information concerning the limits on the ability of the portfolios
to use these investments in "What Are the Investment Policies of the
Portfolios?"
Balanced Portfolio
. Equity securities.
. Debt securities.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Equity Portfolio
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Mid Cap Equity Portfolio
. Equity securities.
. Short-term investments.
. Futures.
. Options.
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. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Equity Portfolio For Taxable Investors
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
- --------------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities, such
as zero-coupon bonds, do not pay current interest and are purchased at a
discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities include
treasury notes, which have initial maturities of one to ten years and
treasury bonds, which have initial maturities of at least ten years and
certain types of mortgage-backed securities that are described under
"Mortgage-Backed Securities" and "Other Asset-Backed Securities." This SAI
discusses mortgage-backed treasury and agency securities in detail in the
section called "Mortgage-Backed Securities" and "Other Asset-Backed
Securities."
The full faith and credit of the U.S. government supports treasury
securities. Unlike treasury securities, the full faith and credit of the U.S.
government generally do not back agency securities. Agency securities are
typically supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the
credit risk is minimal. The U.S. government does not guarantee the net asset
value of the assets of a portfolio.
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Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors, the
corporation promises to pay investors interest, and repay the principal amount
of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that various
governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities. Since
homeowners usually have the option of paying either part or all of the loan
balance before maturity, the effective maturity of a mortgage-backed security is
often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The adviser will consider such
insurance and guarantees and the creditworthiness of the issuers thereof in
determining whether a mortgage-related security meets its investment quality
standards. It is possible that the private insurers or guarantors will not meet
their obligations under the insurance policies or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of a
portfolio's shares. To buy GNMA securities, a portfolio may have to pay a
premium over the maturity value of the underlying mortgages, which the portfolio
may lose if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Securities issued by FNMA are agency securities, which
means FNMA, but not the U.S. government, guarantees their timely payment of
principal and interest
Federal Home Loan Mortgage Corporation (FHLMC)
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FHLMC is a corporate instrumentality of the U.S. government whose stock is owned
by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970 to
increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional mortgage loans. In addition to guaranteeing the
mortgage-related security, such issuers may service and/or have originated the
underlying mortgage loans. Pools created by these issuers generally offer a
higher rate of interest than pools created by GNMA, FNMA & FHLMC because they
are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off their
mortgage earlier than expected forcing a portfolio to reinvest the money at a
lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, a portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-through.
In general, the collateral supporting these securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments
with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets, which raises the possibility
that recoveries on repossessed collateral may not be available to support
payments on these securities. For example, credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which allow debtors to reduce their
balances by offsetting certain amounts owed on the credit cards. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Due to the quantity of vehicles involved and
requirements under state laws, asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity
4
<PAGE>
protection"). In addition, asset-backed securities may obtain insurance, such as
guarantees, policies or letters of credit obtained by the issuer or sponsor from
third parties, for some or all of the assets in the pool ("credit support").
Delinquency or loss more than that anticipated or failure of the credit support
could adversely affect the return on an investment in such a security.
A portfolio may also invest in residual interests in asset-backed securities,
which is the excess cash flow remaining after making required payments on the
securities and paying related administrative expenses. The amount of residual
cash flow resulting from a particular issue of asset-backed securities depends
in part on the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche of
CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its assets in
the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a short-
term debt security has a maturity of one year or less.
Bank Obligations
A portfolio will only invest in a security issued by a commercial bank if the
bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation. A
portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
5
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Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. A portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue rated
A or better by Moody's or by S&P. See "Bond Ratings" for a description of
commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two classes
that receive different proportions of interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal, while the other class will receive most of the
interest and the remaining principal. In extreme cases, one class will receive
all of the interest ("interest only" or "IO" class) while the other class will
receive the entire principal sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage loans or mortgage-backed
securities. A rapid rate of principal payments may adversely affect the yield to
maturity of IOs. Slower than anticipated prepayments of principal may adversely
affect the yield to maturity of a PO. The yields and market risk of interest
only and principal only stripped mortgage-backed securities, respectively, may
be more volatile than those of other fixed income securities, including
traditional mortgage-backed securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which are
not typically associated with investing in domestic securities. See "FOREIGN
SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold at
a discount from their face value. When held to maturity, their entire income,
which consists of accretion of discount, comes from the difference between the
issue price and their value at maturity. The amount of the discount rate varies
depending on factors including the time remaining until maturity, prevailing
interest rates, the security's liquidity and the issuer's credit quality. The
market value of zero coupon securities may exhibit greater price volatility than
ordinary debt securities because a stripped security will have a longer duration
than an ordinary debt security with the same maturity. A portfolio's investments
in pay-in-kind, delayed and zero coupon bonds may require it to sell certain of
its portfolio securities to generate sufficient cash to satisfy certain income
distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by their
holder, typically a custodian bank or investment brokerage firm. Once the holder
of the security has stripped or separated corpus and coupons, it may sell each
component separately. The principal or corpus is then sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. The underlying
treasury security is held in book-entry form at the Federal Reserve Bank or, in
the case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the owners
thereof. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero coupon securities that
the Treasury sells itself.
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<PAGE>
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on Treasury securities through
the Federal Reserve book-entry record keeping system. Under a Federal Reserve
program known as "STRIPS" or "Separate Trading of Registered Interest and
Principal of Securities," a portfolio can record its beneficial ownership of
the coupon or corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead, it
calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by a portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security
is estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return
based on an expectation of how much interest rates, in general, will change.
While serving as a good estimator of prospective returns, effective duration
is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. A
portfolio may then have to reinvest the proceeds from such
7
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prepayments at lower interest rates, which can reduce its yield. The
unexpected timing of mortgage and asset-backed prepayments caused by the
variations in interest rates may also shorten or lengthen the average
maturity of a portfolio. If left unattended, drifts in the average maturity
of a portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the expected
performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of a portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates.
For these reasons, mortgage-backed securities may be less effective than
other types of U.S. government securities as a means of "locking in" interest
rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation
for assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and
complete repayment of principal is less certain. The credit rating or
financial condition of an issuer may affect the value of a debt security.
Generally, the lower the quality rating of a security, the greater the risks
that the issuer will fail to pay interest and return principal. To compensate
investors for taking on increased risk, issuers with lower credit ratings
usually offer their investors a higher "risk premium" in the form of higher
interest rates above comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an adjustment
to this "risk premium." Since an issuer's outstanding debt carries a fixed
coupon, adjustments to the risk premium must occur in the price, which
effects the yield to maturity of the bond. If an issuer defaults or becomes
unable to honor its financial obligations, the bond may lose some or all of
its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and
are less likely to make payments of interest and principal. Market
developments and the financial and business condition of the corporation
issuing these securities influences their price and liquidity more than
changes in interest rates, when compared to investment-grade debt securities.
Insufficient liquidity in the junk bond market may make it more difficult to
dispose of junk bonds and may cause a portfolio to experience sudden and
substantial price declines. A lack of reliable, objective data or market
quotations may make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's
opinion, not an absolute standard of quality, and they do not reflect an
evaluation of market risk. The section "Bond Ratings" contains further
information concerning the ratings of certain rating agencies and their
significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time a portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the
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security and will take appropriate actions if a rating agency reduces the
security's rating. A portfolio is not obligated to dispose of securities
whose issuers subsequently are in default or which are downgraded below the
above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner,
to reduce transaction costs or to remain fully invested. They may also invest
in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates. Investing in derivatives
for these purposes is known as "hedging." When hedging is successful, the
portfolio will have offset any depreciation in the value of its portfolio
securities by the appreciation in the value of the derivative position.
Although techniques other than the sale and purchase of derivatives could be
used to control the exposure of the portfolio to market fluctuations, the use
of derivatives may be a more effective means of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party
sells and the other party agrees to buy a specified amount of a financial
instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index,
interest rate, foreign exchange rate or other similar instrument. Agreeing to
buy the underlying financial information is called buying a futures contract
or taking a long position in the contract. Likewise, agreeing to sell the
underlying financial instrument is called selling a futures contract or
taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date
(the delivery date). Contract markets require both the purchaser and seller
to deposit "initial margin" with a futures broker, known as a futures
commission merchant, when they enter into the contract. Initial margin
deposits are typically equal to a percentage of the contract's value. After
they open a futures contract, the parties to the transaction must compare the
purchase price of the contract to its daily market value. If the value of the
futures contract changes in such a way that a party's position declines, that
party must make additional "variation margin" payments so that the margin
payment is adequate. On the other hand, the value of the contract may change
in such a way that there is excess margin on deposit, possibly entitling the
party that has a gain to receive all or a portion of this amount. This
process is known as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the sale price upon closing out the contract is less than the
original purchase price, the person closing out the contract will realize a
loss. If the sale price upon closing out the contract is more that the
original purchase price, the person closing out the contract will realize a
gain. The opposite is also true. If the purchase price upon closing out the
contract is more than the original sale price, the person closing out the
contract will realize a loss. If the purchase price upon closing out the
contract is less than the original sale price, the person closing out the
contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
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Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if
the price of the underlying instrument does not fall enough to offset the
cost of purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the exercise
price plus the premium paid and related transaction costs. Otherwise, the
portfolio would realize either no gain or a loss on the purchase of the call
option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the portfolio
would hope to profit by closing out the put option at a lower price. If
security prices fall, the portfolio may lose an amount of
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money equal to the difference between the value of the security and the
premium it received. Writing covered put options may deprive the portfolio of
the opportunity to profit from a decrease in the market price of the
securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the difference
between the exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than
price fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract
(in the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option).
If the option is exercised, the parties will be subject to the futures
contracts. In addition, the writer of an option on a futures contract is
subject to initial and variation margin requirements on the option position.
Options on futures contracts are traded on the same contract market as the
underlying futures contract.
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The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased
or sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead
of selling or buying futures contracts. The portfolio may buy a put option on
a futures contract for the same reasons it would sell a futures contract. It
also may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures
contracts, such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against
a decline in the prices of the instrument underlying the futures contracts.
If the price of the futures contract at expiration were below the exercise
price, the portfolio would retain the option premium, which would offset, in
part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if the market price declines, the
portfolio would pay more than the market price for the underlying instrument.
The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing
a call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a
lower price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder has
the unilateral right to cancel the contract at maturity by paying a specified
fee. Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed
to futures contracts which are traded only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received.
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Entering into a forward contract for the purchase or sale of the amount of
foreign currency involved in an underlying security transaction for a fixed
amount of U.S. dollars "locks in" the U.S. dollar price of the security. The
portfolio may also use forward contracts to purchase or sell a foreign
currency when it anticipates purchasing or selling securities denominated in
foreign currency, even if it has not yet selected the specific investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the increase
in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in
the hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes
in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of such
security exceeds the amount of foreign currency it is obligated to deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing
rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the portfolio,
the portfolio must be prepared to make such payments when due. In addition,
if the counter-party's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed
upon by the parties. The agreement can be terminated before the maturity
date only under limited circumstances, such as default by one of the parties
or insolvency, among others, and can be transferred by a party only with the
prior written consent of the other party. The portfolio may be able to
eliminate its exposure under a swap agreement either by assignment or by
other disposition, or by entering into an offsetting swap agreement with the
same party or a similarly creditworthy party. If the counter-party is unable
to
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meet its obligations under the contract, declares bankruptcy, defaults or
becomes insolvent, the portfolio may not be able to recover the money it
expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the SEC. If the portfolio enters into a swap
agreement on a net basis, it will segregate assets with a daily value at
least equal to the excess, if any, of the portfolio's accrued obligations
under the swap agreement over the accrued amount the portfolio is entitled to
receive under the agreement. If the portfolio enters into a swap agreement on
other than a net basis, it will segregate assets with a value equal to the
full amount of the portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in
return for a specified interest rate. By entering into an equity index swap,
for example, the index receiver can gain exposure to stocks making up the
index of securities without actually purchasing those stocks. Equity index
swaps involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of
interest rate cash flow on specified dates in the future. Some of the
different types of interest rate swaps are "fixed-for floating rate swaps,"
"termed basis swaps" and "index amortizing swaps." Fixed-for floating rate
swap involve the exchange of fixed interest rate cash flows for floating rate
cash flows. Termed basis swaps entail cash flows to both parties based on
floating interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the portfolio enters into a swap where it agrees
to exchange a floating rate of interest for a fixed rate of interest, the
portfolio may have to pay more money than it receives. Similarly, if the
portfolio enters into a swap where it agrees to exchange a fixed rate of
interest for a floating rate of interest, the portfolio may receive less
money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in
which one party agrees to make interest rate payments in one currency and the
other promises to make interest rate payments in another currency. A
portfolio may enter into a currency swap when it has one currency and desires
a different currency. Typically the interest rates that determine the
currency swap payments are fixed, although occasionally one or both parties
may pay a floating rate of interest. Unlike an interest rate swap, however,
the principal amounts are exchanged at the beginning of the contract and
returned at the end of the contract. Changes in foreign exchange rates and
changes in interest rates, as described above may negatively affect currency
swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these
transactions themselves entail certain other risks. For example,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance of the portfolio
than if it had not entered into any derivatives transactions. Derivatives may
magnify the portfolio's gains or losses, causing it to make or lose
substantially more than it invested.
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When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with
a derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends
on the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of
poor correlation, the price of the securities the portfolio is hedging may
not move in the same amount, or even in the same direction as the hedging
instrument. The adviser will try to minimize this risk by investing only in
those contracts whose behavior it expects to resemble the portfolio
securities it is trying to hedge. However, if the portfolio's prediction of
interest and currency rates, market value, volatility or other economic
factors is incorrect, the portfolio may lose money, or may not make as much
money as it expected.
Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that may
cause such a divergence:
. current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an instrument
stops; and
. differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the participation
of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on a
broad market index. Since narrower indices are made up of a smaller number of
securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of the
investments of the portfolio. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
portfolio against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the portfolio's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the portfolio's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange the
contract was initially traded. Although a portfolio intends to purchase options
and futures only where there appears to be an active market, there is no
guarantee that such a liquid market will exist. If there is no secondary market
for the contract, or the market is illiquid, the portfolio may not be able to
close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
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. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time
and price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise
at a price below the current market price. Similarly, if the portfolio were
to write a put option based on the adviser's expectation that the price of
the underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum
amount that the price of a derivative may vary from the settlement price of
that derivative at the end of trading on the previous day. Once the price of
a derivative reaches this value, a portfolio may not trade that derivative at
a price beyond that limit. The daily limit governs only price movements
during a given day and does not limit potential gains or losses. Derivative
prices have occasionally moved to the daily limit for several consecutive
trading days, preventing prompt liquidation of the derivative.
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
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If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker-dealer with whom it has an open futures contract or related
option becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other respects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give
the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
17
<PAGE>
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to
the company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of
their small or medium size, limited markets and financial resources, narrow
product lines and frequent lack of management depth. The securities of small
and medium companies are often traded in the over-the-counter market and
might not be traded in volumes typical of securities traded on a national
securities exchange. Thus, the securities of small and medium capitalization
companies are likely to be less liquid, and subject to more abrupt or erratic
market movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in various
industries. Since these industries frequently share common characteristics,
an event or issue affecting one industry may significantly influence other,
related industries. For example, technology companies may be strongly
affected by worldwide scientific or technological developments and their
products and services may be subject to governmental regulation or adversely
affected by governmental policies.
FOREIGN SECURITIES
- --------------------------------------------------------------------------------
Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
20
<PAGE>
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities. EDRs are similar to ADRs, except that they are
typically issued by European Banks or trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. Investments in these investment funds are subject to the
provisions of the 1940 Act. Shareholders of a UAM Fund that invests in such
investment funds will bear not only their proportionate share of the expenses
of the UAM Fund (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in foreign
securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
19
<PAGE>
. The economies of many foreign countries are dependent on international trade
and their trading partners and they could be severely affected if their
trading partners were to enact protective trade barriers and economic
conditions;
. The internal policies of a particular foreign country may be less stable than
in the United States. Other countries face significant external political
risks, such as possible claims of sovereignty by other countries or tense and
sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or control
foreign investments in its securities markets. These restrictions could limit
the portfolio's ability to invest in a particular country or make it very
expensive for the portfolio to invest in that country. Some countries require
prior governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may restrict the
ability of foreign investors to repatriate their investment income and
capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter (OTC)
market located outside of the United States will be the best available market
for foreign securities. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as the markets in the United
States. Foreign stocks markets tend to differ from those in the United States
in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the United
States dollar will result in a corresponding change in value of securities
denominated in that currency. Some of the factors that may impair the
investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates;
20
<PAGE>
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover
a portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the
21
<PAGE>
portfolio expects the conversion to the Euro to impact investments in
countries that adopt the Euro in all aspects of the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting. Some of the uncertainties surrounding the conversion
to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
Investment Companies
- --------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by a portfolio. Like other shareholders, each portfolio
would pay its proportionate share of those fees. Consequently, shareholders of
a portfolio would pay not only the management fees of the portfolio, but also
the management fees of the investment company in which the portfolio invests.
A portfolio may invest up to 10% of its total assets in the securities of
other investment companies, but may not invest more than 5% of its total
assets in the securities of any one investment company or acquire more than 3%
of the outstanding securities of any one investment company.
The SEC has granted an order that allows a portfolio to invest the greater of
5% of its total assets or $2.5 million in the UAM DSI Money Market Portfolio,
provided that the investment is:
. For cash management purposes;
. Consistent with a portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
Repurchase Agreements
- ---------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When a portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, a portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before a portfolio can sell it and a portfolio might incur expenses in
enforcing its rights.
22
<PAGE>
Restricted Securities
- ---------------------
The portfolios may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of these
securities could be more or less than those originally paid by a portfolio or
less than what may be considered the fair value of such securities.
Securities Lending
- ------------------
A portfolio may lend a portion of its total assets to broker- dealers or other
financial institutions. It may then reinvest the collateral it receives in
short-term securities and money market funds. When a portfolio lends its
securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U. S.
government;
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
When Issued Transactions
- ------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, a
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future. In
each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or deliver securities
until a later date. Typically, no income accrues on securities a portfolio has
committed to purchase before the securities are delivered, although the
portfolio may earn income on securities it has in a segregated account. A
portfolio will only enter into these types of transactions with the intention
of actually acquiring the securities, but may sell them before the settlement
date.
A portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When a portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, a
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
23
<PAGE>
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because a portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
A portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. A portfolio will segregate additional liquid assets daily so that
the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolios
A portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, a
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
Fundamental Policies
- --------------------
The following investment limitations are fundamental, which means a portfolio
cannot change them without approval by the vote of a majority of the
outstanding voting securities of the portfolio, as defined by the 1940 Act.
Each of the portfolios will not:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the of the
U.S. government or any if its agencies or instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Borrow, except (1) from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest for the purpose of exercising control over management of any
company.
. Invest in commodities except that each portfolio may invest in futures
contracts and options to the extent that not more than 5% of a portfolio's
assets are required as deposit to secure obligations under futures
contracts.
. Invest in stock or bond futures and/or options on futures unless not more
than 20% of the portfolio's assets are invested in stock or bond futures
and options.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the u.s. government, and its agencies when a portfolio
adopts a temporary defensive position.
. Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1) making any
permitted borrowings, mortgages or pledges, or (2) entering into options,
futures or repurchase transactions.
. Make loans except by purchasing debt securities in accordance with its
investment objective and policies, or entering into repurchase agreements,
or by lending its portfolio securities to banks, brokers, dealers and other
24
<PAGE>
financial institutions so long as such loans are in compliance with the
1940 Act, and the rules and regulations or interpretations of the sec.
. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total assets.
. Purchase on margin or sell short, except as specified above.
. Purchase or retain securities of an issuer if those officers and board
members or its investment adviser owning more than 1/2 1/2 of 1% of such
securities together own more than 5% of such securities.
. Purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate and may purchase and sell securities
which are secured by interests in real estate.
. Underwrite the securities of other issuers or invest more than an aggregate
of 10% of the net assets of the portfolio, determined at the time of
investment, in securities subject to legal or contractual restrictions on
resale or securities for which there are no readily available markets,
including repurchase agreements having maturities of more than seven days.
. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to execute
policies the board has formulated. The Fund pays each board member who is not
also an officer or affiliated person (independent board member) a $150
quarterly retainer fee per active portfolio and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and
other expenses incurred while attending board meetings. The $2,000 meeting fee
and expense reimbursements are aggregated for all of the board members and
allocated proportionately among the portfolios of the UAM Funds Complex. The
Fund does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from the
UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act. Mr.
English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in the
UAM Funds Complex. However, the Fund does not believe that the relationship is
a material business relationship, and, therefore, does not consider him to be
an "interested person" of the Fund. If these circumstances change, the Board
will determine whether any action is required to change the composition of the
Board.
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Aggregate Compensation
Principal Occupations From the Fund as of From the Fund Complex
Name, Address, DOB Position with Fund During the Past 5 years October 31, 1999 as of October 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board Member President of Squam $7,137 $10,625
College Road -- RFD 3 Investment Management
Meredith, NH 03253 Company, Inc. and Great
1/26/29 Island Investment
Company, Inc.; President
of Bennett Management
Company from 1988 to 1993.
- -----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Member Financial Officer of $7,137 $10,625
1250 24/th/ St., NW World Wildlife Fund since
Washington, DC 20037 January 1999; Vice
8/14/51 President for Finance and
Administration and
Treasurer of Radcliffe
College from 1991 to 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Member Executive Vice President $7,137 $10,625
100 King Street West and Chief Administrative
P.O. Box 2440, LCD-1 Officer of Philip
Hamilton Ontario, Services Corp.; Formerly,
Canada L8N-4J6 a Partner in the
4/21/42 Philadelphia office of
the law firm Dechert
Price & Rhoads and a
Director of Hofler Corp.
- ----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board Member President and Chief $7,137 $10,625
16 West Madison Street Executive Officer of
Baltimore, MD 21201 Broventure Company, Inc.;
8/5/48 Chairman of the Board of
Chektec Corporation and
Cyber Scientific, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board Member President of UAM 0 0
211 Congress Street Investment Services, Inc.
Boston, MA 02110 since March 1999; Vice
2/24/53 President UAM Trust
Company since January
1996; Principal of UAM
Fund Distributors, Inc.
since December 1995; Vice
President of UAM
Investment Services, Inc.
from January 1996 to
March 1999 and a Director
and Chief Operating
Officer of CS First
Boston Investment
Management from 1993-1995.
- ----------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Member; President Chairman, Chief Executive 0 0
One International Place and Chairman Officer and a Director of
Boston, MA 02110 United Asset Management
3/21/35 Corporation; Director,
Partner or Trustee of
each of the Investment
Companies of the Eaton
Vance Group of Mutual
Funds.
- ----------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board Member President and Chief 0 0
One Financial Center Investment Officer of
Boston, MA 02111 Dewey Square Investors
7/1/43 Corporation since 1988;
Director and Chief
Executive Officer of H.T.
Investors, Inc., formerly
a subsidiary of Dewey
Square.
- ----------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice President Executive Vice President 0 0
One International Place and Chief Financial
Boston, MA 02110 Officer of United Asset
9/19/47 Management Corporation.
- ----------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and 0 0
211 Congress Street UAMFDI; Treasurer of the
Boston, MA 02110 Fidelity Group of Mutual
7/4/51 Funds from 1991 to 1995;
held various other
offices with Fidelity
Investments from November
1990 to March 1995.
- -----------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Treasurer Vice President of UAMFSI; 0 0
211 Congress Street Manager of Fund
Boston, MA 02110 Administration and
9/18/63 Compliance of Chase
Global Fund Services
Company from 1995 to
1996; Senior Manager of
Deloitte & Touche LLP
from 1985 to 1995,
- -----------------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Treasurer Director, Mutual Fund 0 0
SEI Investments Operations - SEI
One Freedom Valley Rd. Investments; Senior
Oaks, PA 19456 Manager at Arthur
12/17/63 Andersen prior to 1994.
</TABLE>
26
<PAGE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned Portfolio Class
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Union National Bank 65.02% C&B Balanced Portfolio Institutional Class Shares
FBO UFCW Local 56 & Food Industry
525 West WT Harris Blvd CMG NC 1151
Charlotte, NC 28262-8522
----------------------------------------------------------------------------------------------------------------------------
St. Andrews Church 11.73% C&B Balanced Portfolio Institutional Class Shares
Memorial Endowment Fund
PO Box 1287
Edgartown, MA 02539-1287
----------------------------------------------------------------------------------------------------------------------------
First Union National Bank 34.82% C&B Balanced Portfolio Institutional Class Shares
FBO AAA Inc Traffic Safety
525 West WT Harris Blvd CMG NC 1151
Charlotte, NC 28262-8522
-----------------------------------------------------------------------------------------------------------------------------
NFSC FEBO 14.47% C&B Equity Portfolio Institutional Class Shares
Firstar - Reinvest 401K
PO Box 1787
Mutual Funds, 9/th/ FL
Milwaukee, WI 53201-1787
-----------------------------------------------------------------------------------------------------------------------------
Ironworkers Local 397 Pension Fund 10.08% C&B Equity Portfolio Institutional Class Shares
c/o Administrative Services Inc.
Attn: Fund Accounting
PO Box 83900
Miami, FL 332839000
-----------------------------------------------------------------------------------------------------------------------------
Bruce J. Oliveira 8.88% C&B Equity Portfolio Institutional Class Shares
Administrator/TTEE
FBO IBEW Local 223 Pension Trst Fnd
PO Box 1238
Lakeville, MA 02347-7238
-----------------------------------------------------------------------------------------------------------------------------
Central New York Community 8.86% C&B Equity Portfolio Institutional Class Shares
Foundation Inc.
500 S. Salina St. Ste 428
Syracuse, NY 13202-3314
-----------------------------------------------------------------------------------------------------------------------------
A. Cirillo, D. Faicco, R. Samuels 5.23% C&B Equity Portfolio Institutional Class Shares
Joseph Guerrera & David Smith TR
Fulton Fish Market PFA 7 DEC TR
PART Fulton Fish Market Pension
140 Beekman Street
New York, NY 10038-02010
-----------------------------------------------------------------------------------------------------------------------------
Patricia Schlitt 29.88% C&B Equity Portfolio for Institutional Class Shares
S. Sanford Schlitt Taxable Investors
Subject to DST TOD Rules
491 Meadow Lark Drive
Sarasota, FL 34236-1901
-----------------------------------------------------------------------------------------------------------------------------
John Musselman TR 15.90% C&B Equity Portfolio for Institutional Class Shares
John Musselman Revocable Trust Taxable Investors
22 Kent Street
Windham, NH 03087-1645
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned Portfolio Class
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ann Hauptman & Cynthia Jacobs 11.20% C&B Equity Portfolio for Institutional Class Shares
TR FBO Gunther A. Hauptman TR Taxable Investors
4 Briga Ln
White Plains, NY 10605-4647
--------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 9.32% C&B Equity Portfolio for Institutional Class Shares
Reinvest Account Taxable Investors
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
---------------------------------------------------------------------------------------------------------------------------------
Bruce A. Boulware & Lizabeth A. 8.38% C&B Equity Portfolio for Institutional Class Shares
Boulware TWROS Taxable Investors
1 Central Park West Apt 28E
New York, NY 10023-7703 10023
---------------------------------------------------------------------------------------------------------------------------------
Ray Hatcher & 5.54% C&B Equity Portfolio for Institutional Class Shares
Kathleen S. Hatcher TWROS Taxable Investors
2504 W. 98th Street
Cleveland, OH 44102-4608
---------------------------------------------------------------------------------------------------------------------------------
Vanguard Fiduciary Trust Co. 76.51% C&B Mid Cap Equity Institutional Class Shares
FBO UAM Corp Profit Sharing Portfolio
401K Plan, Vanguard Fiduciary
Trust Group Sp. Servies
PO Box 2600 VM 421
Valley Forge, PA 19482-2600
------------------------------------------------------------------------------------------------------------------------------
UAM Trust Co CUST 6.96% C&B Mid Cap Equity Institutional Class Shares
FBO John J. Medveckis R/O IRA Portfolio
C/O Cooke & Bieler Inc.
1700 Market Street, Suite 3222
Philadelphia, PA 19103-3912
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolios.
Investment Advisory and Other Services
Investment Adviser
Cooke & Bieler, Inc., a Pennsylvania corporation located at 1700 Market
Street, Philadelphia, PA 19103, is the investment adviser to each of the
portfolios. The adviser manages and supervises the investment of each
portfolio's assets on a discretionary basis. The adviser, an affiliate of
United Asset Management Corporation, has provided investment management
services to corporations, foundations, endowments, pension and profit sharing
plans, trusts, estates and other institutions and individuals since 1951.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them
to continue to provide investment management services that are intended to
meet the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on
a day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds Complex.
28
<PAGE>
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Fund has filed each agreement with the SEC as part
of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of a portfolio's assets;
. Continuously reviews, supervises and administers the investment program of
a portfolio; and
. Determines what portion of a portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties
under the Investment Advisory Agreement, (2) reckless disregard by the
adviser of its obligations and duties under the Investment Advisory
Agreement, or (3) a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services, the adviser shall not be
subject to any liability whatsoever to the Fund, for any error of judgment,
mistake of law or any other act or omission in the course of, or connected
with, rendering services under the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Board Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
29
<PAGE>
Advisory Fees
For its services, each portfolio pays its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of the
portfolio. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that a portfolio pays in any given year may
be different from the rate set forth in its contract with the adviser. For
the last three fiscal years, the portfolios paid the following in management
fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Investment Advisory Total Investment
Fees Paid Investment Fees Waived Advisory Fees
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Portfolio $105,758 $102,289 $ 3,469
1999
---------------------------------------------------------------------------------------------------------------------
1998 $ 70,255 $ 67,927 $ 2,328
---------------------------------------------------------------------------------------------------------------------
1997 $ 89,715 $ 54,862 $ 34,853
---------------------------------------------------------------------------------------------------------------------
Equity Portfolio $677,029 $ 0 $677,029
1999
---------------------------------------------------------------------------------------------------------------------
1998 $966,726 $ 0 $966,726
---------------------------------------------------------------------------------------------------------------------
1997 $882,890 $ 0 $882,890
---------------------------------------------------------------------------------------------------------------------
Mid Cap Equity Portfolio $ 0 $ 8,217 $ 0
1999
---------------------------------------------------------------------------------------------------------------------
1998 $ 0 $ 3,589 $ 0
---------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------
Equity Portfolio For Taxable Investors $ 0 $ 23,723 $ 0
1999
---------------------------------------------------------------------------------------------------------------------
1998 $ 0 $ 16,532 $ 0
---------------------------------------------------------------------------------------------------------------------
1997 $ 0 $ 3,003 $ 0
</TABLE>
Distributor
- -----------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services. UAMFDI, an affiliate of UAM, is located at 211
Congress Street, Boston, Massachusetts 02110.
Shareholder Servicing Arrangements
- ----------------------------------
UAM and each of its affiliates, may, at its own expense, compensate a Service
Agent or other person for marketing, shareholder servicing, record-keeping
and/or other services performed with respect to the Fund or the portfolio. The
person making such payments may do so out of its revenues, its profits or any
other source available to it. Such services arrangements, when in effect, are
made generally available to all qualified service providers. The adviser may
also compensate its affiliated companies for referring investors to the
portfolio.
Administrative Services
- -----------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
30
<PAGE>
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if
the Board specifically approves such continuance every year. The Board or
UAMFSI may terminate the Fund Administration Agreement, without penalty, on
not less than ninety (90) days' written notice. The Fund Administration
Agreement automatically terminates upon its assignment by UAMFSI without the
prior written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
Administration and Transfer Agency Services Fees
Each portfolio pays a four-part fee to UAMFSI as follows:
1 In exchange for administrative services, a portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at the
following rates:
Annual Rate
---------------------------------------------------
Balanced Portfolio 0.063%
---------------------------------------------------
Equity Portfolio 0.043%
---------------------------------------------------
Mid Cap Equity Portfolio 0.043%
---------------------------------------------------
Equity Portfolio For Taxable Investors 0.043%
2 Each portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is calculated
at the annual rate of:
. Not more than $35,000 for the first operational class; plus
31
<PAGE>
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM Funds
Complex.
3 An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
4 An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational
class and $2,500 for each additional class.
For the last three fiscal years the portfolios paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Portfolio $18,964 $ 58,849 $ 77,813
1999
--------------------------------------------------------------------------------------------------------------
1998 $16,107 $ 79,810 $ 95,917
--------------------------------------------------------------------------------------------------------------
1997 $13,866 $ 76,870 $ 90,736
--------------------------------------------------------------------------------------------------------------
Equity Portfolio $54,969 $ 94,088 $149,057
1999
--------------------------------------------------------------------------------------------------------------
1998 $31,273 $145,022 $176,295
--------------------------------------------------------------------------------------------------------------
1997 $56,505 $137,773 $194,278
--------------------------------------------------------------------------------------------------------------
Mid Cap Equity Portfolio $ 8,500 $ 40,291 $ 48,791
1999
--------------------------------------------------------------------------------------------------------------
1998 $ 1,690 $ 23,821 $ 25,511
--------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
--------------------------------------------------------------------------------------------------------------
Equity Portfolio For Taxable Investors $ 6,592 $ 57,574 $ 64,166
1999
--------------------------------------------------------------------------------------------------------------
1998 $ 3,684 $ 61,533 $ 65,217
--------------------------------------------------------------------------------------------------------------
1997 $ 191 $ 23,521 $ 23,712
</TABLE>
Custodian
- ---------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
Independent Accountants
- -----------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
Brokerage Allocation and Other Practices
Selection of Brokers
Each Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect to
all transactions for the portfolio. The adviser may select brokers based on
research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and not
instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes it
is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
32
<PAGE>
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for
their clients.
Simultaneous Transactions
- -------------------------
The adviser makes investment decisions for each portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the
same security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolios, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
Brokerage Commissions
- ---------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When a portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
Commissions Paid
For the last three fiscal years, the portfolios paid the following in
brokerage commissions:
Brokerage Commissions
------------------------------------------------------------
Balanced Portfolio $ 13,851
1999
------------------------------------------------------------
1998 $ 14,854
------------------------------------------------------------
1997 $ 14,006
------------------------------------------------------------
Equity Portfolio $201,243
1999
------------------------------------------------------------
1998 $144,662
------------------------------------------------------------
1997 $137,773
------------------------------------------------------------
Mid Cap Equity Portfolio $ 4,754
1999
------------------------------------------------------------
1998 $ 2,184
------------------------------------------------------------
1997 N/A
------------------------------------------------------------
Equity Portfolio For Taxable Investors $ 2,287
1999
------------------------------------------------------------
1998 $ 5,124
------------------------------------------------------------
1997 $ 1,054
33
<PAGE>
Capital Stock and Other Securities
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its name
to "UAM Funds, Inc." The Fund's principal executive office is located at 211
Congress Street, Boston, MA 02110; however, shareholders should direct all
correspondence to the address listed on the cover of this SAI. The Fund is an
open-end management company.
Description Of Shares And Voting Rights
- ---------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing board
to issue three billion shares of common stock, with a $.001 par value. The
governing board has the power to create and designate one or more series
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder approval.
When issued and paid for, the shares of each series and class of the Fund are
fully paid and nonassessable, and have no pre-emptive rights or preference as
to conversion, exchange, dividends, retirement or other features.
The shares of each series and class have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of members of the governing board can elect all of the members if they choose
to do so. On each matter submitted to a vote of the shareholders, a
shareholder is entitled to one vote for each full share held (and a
fractional vote for each fractional share held), then standing in his name on
the books of the Fund. Shares of all classes will vote together as a single
class except when otherwise required by law or as determined by the members
of the Fund's governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. The liquidation of any portfolio
or class thereof may be authorized at any time by vote of a majority of the
members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are identical
in all respects. Unlike Institutional and Adviser Class Shares, Institutional
Service Class Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Adviser
Class Shares impose a sales load on purchases. The classes also have
different exchange privileges. The net income attributable to Institutional
Service Class Shares and the dividends payable on Institutional Service Class
Shares will be reduced by the amount of the shareholder servicing and
distribution fees; accordingly, the net asset value of the Institutional
Service Class Shares will be reduced by such amount to the extent a portfolio
has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
34
<PAGE>
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
Each portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income
to shareholders each year so that the portfolio itself generally will be
relieved of federal income and excise taxes. If a portfolio were to fail to
so qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction.
A portfolios' dividends that are paid to their corporate shareholders and are
attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
Purchase, Redemption and Pricing of Shares
Net Asset Value Per Share
- -------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to
the NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. For purposes of this calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
36
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued neither exceeding the asked prices nor less than
the bid prices. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The converted value is based upon the
bid price of the foreign currency against U.S. dollars quoted by any major
bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at
amortized cost when the governing board determines that amortized cost
reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
Purchase of Shares
- ------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans or
under circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the Fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "How the Fund Values it Assets" at the next
determination of net asset value after acceptance. The Fund will issue shares
of the portfolio at the NAV of the portfolio determined as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
36
<PAGE>
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and that
there are no restrictions on their resale imposed by the 1933 Act or
otherwise;
. All dividends, interest, subscription, or other rights pertaining to such
securities become the property of the portfolio and are delivered to the
fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all securities
of the same issuer held by the portfolio cannot exceed 5% of the net
assets of the portfolio. This condition does not apply to U.S. government
securities.
Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such
exchanges should contact the adviser.
Redemption of Shares
- --------------------
When you redeem, your shares may be worth more or less than the price you
paid for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of shares
or dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and other
organizations.
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to
receive redemption proceeds. To change an account in this manner, you must
submit a written request signed by each shareholder, with each signature
guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable
for any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the UAMSSC
does not employ the procedures described above. Neither the Fund nor the
UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to
be genuine.
37
<PAGE>
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment of
redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth
under "Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to issue signature
guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the Commission may permit.
38
<PAGE>
Exchange Privilege
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
Transfer Of Shares
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
Performance Calculations
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. The performance is calculated separately
for each portfolio.
Total Return
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in a portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a
stated period. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period.
The fund calculates the average annual total return of a portfolio by
finding the average annual compounded rates of return over one, five and
ten-year periods that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each one, five and ten-
year period and the deduction of all applicable Fund expenses on an annual
basis. Since Institutional Service Class Shares bear additional service and
distribution expenses, their average annual total return will generally be
lower than that of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
39
<PAGE>
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the
end of the 1, 5 or 10 year periods (or fractional portion
thereof).
Set forth in the table below are the portfolios' average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from a
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of
10 Years or
One Year Five Years Since Inception Inception Date
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Portfolio 3.10% 12.74% 10.87% 12/29/89
--------------------------------------------------------------------------------------------------------
Equity Portfolio 7.73% 17.43% 13.84% 5/15/90
--------------------------------------------------------------------------------------------------------
Mid Cap Equity Portfolio 2.19% N/A 0.34% 2/18/98
--------------------------------------------------------------------------------------------------------
Equity Portfolio For Taxable Investors 6.23% N/A 10.99% 2/12/97
</TABLE>
Yield
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in a portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds.
As this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during
the base period. Since Institutional Service Class shares bear additional
service and distribution expenses, their yield will generally be lower than
that of the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
Comparisons
- --------------------------------------------------------------------------------
A portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data
reported in financial and industry publications, and various indices as
further described in this SAI. This information may also be included in
sales literature and advertising.
40
<PAGE>
To help investors better evaluate how an investment in a portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various
financial publications. Advertisements may also compare performance (as
calculated above) to performance as reported by other investments, indices
and averages. Please see "Comparative Benchmarks" for publications, indices
and averages that may be used.
In assessing such comparisons of performance, an investor should keep in
mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in a
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not
be identical to the formula used by a portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that a portfolio will continue this
performance as compared to such other averages.
Financial Statements
The following documents are included in the portfolios' October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser to each portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Fund refers to UAM Funds, Inc.
41
<PAGE>
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 Act, the 1940 Act and
the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
Bond Ratings
Moody's Investors Service, Inc.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well-
maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and
asset protection are, nevertheless, expected to be maintained at
adequate levels.
baa An issue that which is rated "baa" is considered to be a medium--
grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of
eventual payments.
42
<PAGE>
c This is the lowest rated class of preferred or preference
stock. Issues so rated can thus be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each
minus (-) rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking and
the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
43
<PAGE>
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals)
Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin
when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics:
. Leading market positions in well-established
industries.
. Conservative capitalization structure with
moderate reliance on debt and ample asset
protection.
. Broad margins in earnings coverage of fixed
financial charges and high internal cash
generation.
. Well-established access to a range of financial
markets and assured sources of alternate
liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the
level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
44
<PAGE>
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior
obligations are typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy, as noted above. Accordingly,
in the case of junior debt, the rating may not conform exactly with
the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to meet
its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
Obligations rated 'BB', 'B', 'CCC' , 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposures to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment,
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on
the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
45
<PAGE>
C A subordinated debt or preferred stock obligation rated 'C' is
CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been
filed or similar action taken, but payments on this obligation
are being continued. A 'C' will also be assigned to a preferred
stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the
credit rating. Examples include: obligation linked or indexed to
equities, currencies, or commodities; obligations exposed to
severe prepayment risk - such as interest-only or principal-only
mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that
Standard & Poor's does not rate a particular obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation.
46
<PAGE>
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not
expired, unless Standard & Poors' believes that such payments
will be made during such grace period. The 'D' rating also will
be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment
is a key factor in this analysis. An obligor's capacity to repay foreign
currency obligations may be lower than its capacity to repay obligations in
its local currency due to the sovereign government's own relatively lower
capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific
issues. Foreign currency issuer ratings are also distinguished from local
currency issuer ratings to identity those instances where sovereign risks
make them different for the same issuer.
Duff & Phelps Credit Rating Co.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of
economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient
BBB- for prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors
fluctuate according to industry conditions. Overall quality may
move up or down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation will
not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating
grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
47
<PAGE>
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-
free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity
for timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions
are more likely to impair this capacity. This is the lowest
investment-grade category.
48
<PAGE>
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a
possibility of credit risk developing, particularly as
the result of adverse economic change over time;
however, business or financial alternatives may be
available to allow financial commitments to be met.
Securities rated in this category are not investment
grade.
B Highly speculative. 'B' ratings indicate that
significant credit risk is present, but a limited
margin of safety remains. Financial commitments are
currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable
business and economic environment.
CCC,CC,C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of
some kind appears probable. 'C' ratings signal imminent
default.
DDD,DD,D Default. The ratings of obligations in this category
are based on their prospects for achieving partial or
full recovery in a reorganization or liquidation of the
obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision,
the following serve as general guidelines. "DDD"
obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued
interest. "D" indicates potential recoveries in the
range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on
some or all of their obligations. Entities rated "DDD"
have the highest prospect for resumption of performance
or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are
generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding
obligations, while entities rated "D" have a poor
prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for
timely payment of financial commitments; may have an
added "+" to denote any exceptionally strong credit
feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of
safety is not as great as in the case of the higher
ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term
adverse changes could result in a reduction to non-
investment grade.
B Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely
reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the 'AAA' long-term
rating category, to categories below 'CCC', or to short-term ratings other
than 'F1'.
'NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
49
<PAGE>
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically
resolved over a relatively short period.
Comparative Benchmarks
(alphabetically)
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time in
the price of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market
fund yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on
the New York Stock Exchange. It has been a widely followed indicator of the
stock market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New
York Times, Personal Investor, The Wall Street Journal and Weisenberger
Investment Companies Service-- publications that rate fund performance over
specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-
weighted index maintained by the International Finance Corporation. This
index consists of over 890 companies in 26 emerging equity markets, and is
designed to measure more precisely the returns portfolio managers might
receive from investment in emerging markets equity securities by focusing
on companies and markets that are legally and practically accessible to
foreign investors.
Lehman Brothers Indices:
-----------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market
value-weighted index that combines the Lehman Government/Corporate Index
and the Lehman Mortgage-Backed Securities Index, and includes treasury
issues, agency issues, corporate bond issues and mortgage backed
securities. It includes fixed rate issuers of investment grade
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(BBB) or higher, with maturities of at least one year and outstanding par
values of at least $100 million for U.S. government issues and $25 million
for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate
debt. Also included are yankee bonds, which are dollar-denominated SEC
registered public, noncovertible debt issued or guaranteed by foreign
sovereign governments, municipalities, or governmental agencies, or
international agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower
bonds and foreign-targeted issues, and the Agency Bond Index (all publicly
issued debt of U.S. government agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. government). In addition to the
aggregate index, sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed
income market value-weighted index that combines the Government and
Corporate Bond Indices, including U.S. government treasury securities,
corporate and yankee bonds. All issues are investment grade (BBB) or
higher, with maturities of at least one year and outstanding par value of
at least $100 million of U.S. government issues and $25 million for others.
Any security downgraded during the month is held in the index until month
end and then removed. All returns are market value weighted inclusive of
accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate,
non-investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity
and an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged
fixed income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of
all fixed-rate securities backed by mortgage pools of Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30
largest mutual funds within their respective portfolio investment
objectives. The indices are currently grouped in six categories: U.S.
Diversified Equity with 12 indices; Equity with 27 indices, Taxable Fixed-
Income with 20 indices, Tax-Exempt Fixed-Income with 28 indices, Closed-End
Funds with 16 indices, and Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment
objectives were changed while other equity objectives remain unchanged.
Changing investment objectives include Capital Appreciation Funds, Growth
Funds, Mid-Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income
Funds, and Equity Income Funds. Unchanged investment objectives include
Sector Equity Funds, World Equity Funds, Mixed Equity Funds, and certain
other funds including all Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in
group; 2) number of component funds remains the same (30); 3) component
funds are defined annually; 4) can be linked historically; and 5) are used
as a benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers,
liquidations, etc.; and 4) will be inaccurate if historical averages are
linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include,
but are not limited to, the following:
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<PAGE>
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an
average of 100 funds that invest at least 65% of assets in investment grade
debt issues (BBB or higher) with dollar-weighted average maturities of one
to five years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds
whose primary objective is to conserve principal by maintaining at all
times a balanced portfolio of both stocks and bonds. Typically, the
stock/bond ratio ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing
60% or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest
funds by asset size which invest in companies with long-term earnings
expected to grow significantly faster than the earnings of the stocks
represented in the major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions,
exclusive of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an
unmanaged index composed of U.S. treasuries, agencies and corporates with
maturities from 1 to 4.99 years. Corporates are investment grade only (BBB
or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market
value-weighted averages of the performance of over 900 securities listed on
the stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign
common stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading
stocks listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
---------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market.
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<PAGE>
Russell 1000(R) Index - an unmanaged index which measures the performance of the
1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000 Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000 Index.
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell Top
200 companies with higher price-to-book ratios and higher forecasted growth
values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell Top
200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are representative
of a diversified, investment grade portfolio of contracts issued by credit
worthy insurance companies. The index is unmanaged and does not reflect any
transaction costs. Direct investment in the index is not possible.
Standard & Poor's U.S. Indices:
- ------------------------------
53
<PAGE>
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10 economic
sectors aggregated from 23 industry groups, 59 industries, and 123 sub-
industries covering almost 6,000 companies globally. The new classification
standard will be used with all of their respective indices. Features of the new
classification include 10 economic sectors, rather than the 11 S&P currently
uses. Sector and industry gradations are less severe. Rather than jumping from
11 sectors to 115 industries under the former S&P system, the new system
progresses from 10 sectors through 23 industry groups, 50 industries and 123
sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market performance.
It is used by 97% of U.S. money managers and pension plan sponsors. More than $1
trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market size,
liquidity, and industry group representation. It is a market-value weighted
index with each stock affecting the index in proportion to its market value. It
is used by over 95% of U.S. managers and pension plan sponsors. More than $25
billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The index
is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred
benchmark for both active and passive management due to its low turnover and
greater liquidity. Approximately $8 billion is indexed to the S&P SmallCap 600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the securities
in the S&P 500 Index according to price-to-book ratio. The Value index contains
the companies with the lower price-to-book ratios; while the companies with the
higher price-to-book ratios are contained in the Growth index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80% of
the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the largest
utility companies listed on the New York Stock Exchange, including 23 electric
power companies, 12 natural gas distributors and 8 telephone companies.
Standard & Poor's CANADA Indices:
- --------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size company
segment of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
- --------------------------------
S&P Global 1200 Index - aims to provide investors with an investable portfolio.
This index, which covers 29 countries and consists of seven regional components,
offers global investors an easily accessible, tradable set of stocks and
particularly suits the new generation of index products, such as exchange-traded
funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
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<PAGE>
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as
the new Canadian large cap benchmark and will ultimately replace the Toronto 35
and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each major
sector of the Tokyo market. It is designed specifically to give portfolio
managers and derivative traders an index that is broad enough to provide
representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan -- are
represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad enough
to provide representation of the market, but narrow enough to ensure liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization) of
the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all treasury
bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return equivalent
yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small company
stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used by
the institutional investment community as a broad measure of the performance of
public real estate equity for asset allocation and performance comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the Wilshire
Real Estate Securities Index.
55
<PAGE>
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
56
<PAGE>
PO UAM Funds
Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The DSI Portfolios
DSI Balanced Portfolio
DSI Disciplined Value Portfolio
DSI Limited Maturity Bond Portfolio
DSI Money Market Portfolio
DSI Small Cap Value Portfolio
Institutional Class Shares
DSI Disciplined Value Portfolio
Institutional Service Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectuses of the portfolios dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address listed
above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Description of Permitted Investments..................................................................................... 1
What Investment Strategies May the Portfolios Use?.................................................................... 1
Debt Securities....................................................................................................... 2
Derivatives........................................................................................................... 9
Equity Securities..................................................................................................... 18
Foreign Securities.................................................................................................... 19
Investment Companies.................................................................................................. 23
Repurchase Agreements................................................................................................. 23
Restricted Securities................................................................................................. 24
Securities Lending.................................................................................................... 24
When Issued Transactions.............................................................................................. 24
Investment Policies of the Portfolios.................................................................................... 25
Fundamental Policies.................................................................................................. 25
Non-Fundamental Policies.............................................................................................. 27
Management Of The Fund................................................................................................... 28
Principal Shareholders................................................................................................... 30
Investment Advisory and Other Services................................................................................... 31
Investment Adviser.................................................................................................... 31
Distributor........................................................................................................... 35
Service And Distribution Plans........................................................................................ 35
Administrative Services............................................................................................... 38
Custodian............................................................................................................. 40
Independent Accountants............................................................................................... 40
Brokerage Allocation and Other Practices................................................................................. 40
Selection of Brokers.................................................................................................. 40
Simultaneous Transactions............................................................................................. 40
Brokerage Commissions................................................................................................. 41
Capital Stock and Other Securities....................................................................................... 41
Description Of Shares And Voting Rights............................................................................... 42
Purchase, Redemption and Pricing of Shares............................................................................... 43
Net Asset Value Per Share............................................................................................. 43
Purchase of Shares.................................................................................................... 44
Redemption of Shares.................................................................................................. 45
Exchange Privilege.................................................................................................... 46
Transfer Of Shares.................................................................................................... 47
Performance Calculations................................................................................................. 47
Total Return.......................................................................................................... 47
Yield................................................................................................................. 48
Comparisons........................................................................................................... 49
Financial Statements..................................................................................................... 49
Glossary................................................................................................................. 49
Bond Ratings............................................................................................................. 50
Moody's Investors Service, Inc........................................................................................ 50
Standard & Poor's Ratings Services.................................................................................... 53
Duff & Phelps Credit Rating Co........................................................................................ 55
Fitch IBCA Ratings.................................................................................................... 56
Comparative Benchmarks................................................................................................... 58
</TABLE>
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIOS USE?
- --------------------------------------------------------------------------------
The portfolios currently intend to use the securities and investment
strategies listed below in seeking their objectives; however, they may at
any time invest in any of the investment strategies described in this SAI.
This SAI describes each of these investments/strategies and their risks. A
portfolio may not notify shareholders before employing new strategies,
unless it expects such strategies to become principal strategies. The
investments that are italicized are principal strategies and you can find
more information on these techniques in the prospectus of the portfolio.
You can find more information concerning the limits on the ability of the
portfolios to use these investments in "What Are the Investment Policies of
the Portfolios?"
Small Cap Value Portfolio
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Disciplined Value Portfolio
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Balanced Portfolio
. Foreign securities.
1
<PAGE>
. Equity securities.
. Debt securities.
. Futures.
. Options.
. Forward currency exchange contracts.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Limited Maturity Bond Portfolio
. Foreign securities.
. Debt securities.
. Futures.
. Options.
. Forward currency exchange contracts.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Money Market Portfolio
. Debt securities.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
- --------------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities,
such as zero-coupon bonds, do not pay current interest and are purchased at
a discount from their face value.
2
<PAGE>
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a
government-sponsored entity has issued (agency securities). Treasury
securities include treasury notes, which have initial maturities of one to
ten years and treasury bonds, which have initial maturities of at least ten
years and certain types of mortgage-backed securities that are described
under "Mortgage-Backed Securities" and "Other Asset-Backed Securities."
This SAI discusses mortgage-backed treasury and agency securities in detail
in the section called "Mortgage-Backed Securities" and "Other Asset-Backed
Securities."
The full faith and credit of the U.S. government supports treasury
securities. Unlike treasury securities, the full faith and credit of the
U.S. government generally do not back agency securities. Agency securities
are typically supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and
interest, their market value is not guaranteed. U.S. government securities
are subject to the same interest rate and credit risks as other fixed
income securities. However, since U.S. government securities are of the
highest quality, the credit risk is minimal. The U.S. government does not
guarantee the net asset value of the assets of a portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or
for capital expenditures such as plant construction, equipment purchases
and expansion. In return for the money loaned to the corporation by
investors, the corporation promises to pay investors interest, and repay
the principal amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble
as securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Since homeowners usually have the option of paying either
part or all of the loan balance before maturity, the effective maturity of
a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure
or guarantee the timely payment of interest and principal of these pools
through various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The adviser
will consider such insurance and guarantees and the creditworthiness of the
issuers thereof in determining whether a mortgage-related security meets
its investment quality standards. It is possible that the private insurers
or guarantors will not meet their obligations under the insurance policies
or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
3
<PAGE>
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related
securities. GNMA is a wholly owned corporation of the U.S. government and
it falls within the Department of Housing and Urban Development. Securities
issued by GNMA are treasury securities, which means the full faith and
credit of the U.S. government backs them. GNMA guarantees the timely
payment of principal and interest on securities issued by institutions
approved by GNMA and backed by pools of FHA-insured or VA-guaranteed
mortgages. GNMA does not guarantee the market value or yield of
mortgage-backed securities or the value of a portfolio's shares. To buy
GNMA securities, a portfolio may have to pay a premium over the maturity
value of the underlying mortgages, which the portfolio may lose if
prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks and
credit unions and mortgage bankers. Securities issued by FNMA are agency
securities, which means FNMA, but not the U.S. government, guarantees their
timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing.
FHLMC issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by
the full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these
issuers generally offer a higher rate of interest than pools created by
GNMA, FNMA & FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually
monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing a portfolio to reinvest
the money at a lower interest rate.
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In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the
loans underlying a mortgage-backed security sooner than expected. If the
prepayment rates increase, a portfolio may have to reinvest its principal
at a rate of interest that is lower than the rate on existing
mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other
than mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are
pass-through. In general, the collateral supporting these securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available
to support payments on these securities. For example, credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which allow debtors to reduce their balances by offsetting certain amounts
owed on the credit cards. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Due to the quantity of vehicles involved and
requirements under state laws, asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the
obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure
the receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by
the issuer or sponsor from third parties, for some or all of the assets in
the pool ("credit support"). Delinquency or loss more than that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
A portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of
asset-backed securities depends in part on the characteristics of the
underlying assets, the coupon rates on the securities, prevailing interest
rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay
principal monthly. While whole mortgage loans may collateralize CMOs,
mortgage-backed securities guaranteed by GNMA, FHLMC, or FNMA and their
income streams more typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code of 1986, as amended, and invests in certain mortgages
primarily secured by interests in real property and other permitted
investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired
by its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the
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lowest tranche of CMOs and REMIC certificates involves risks similar to
those associated with investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its
assets in the short-term securities listed below, U.S. government
securities and investment-grade corporate debt securities. Unless otherwise
specified, a short-term debt security has a maturity of one year or less.
Bank Obligations
A portfolio will only invest in a security issued by a commercial bank if
the bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance
Corporation; and
. is a foreign branch of a U.S. bank and the adviser believes the
security is of an investment quality comparable with other debt
securities that the portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term
with the understanding that the depositor can withdraw its money only by
giving notice to the institution. However, there may be early withdrawal
penalties depending upon market conditions and the remaining maturity of
the obligation. A portfolio may only purchase time deposits maturing from
two business days through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a
definite period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial
transaction (to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1
to 270 days issued by banks, corporations and other borrowers. Such
investments are unsecured and usually discounted. A portfolio may invest in
commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured
debt issue rated A or better by Moody's or by S&P. See "Bond Ratings" for a
description of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class
mortgage-backed securities. Stripped mortgage-backed securities usually
have two classes that receive different proportions of interest and
principal distributions on a pool of mortgage assets. Typically, one class
will receive some of the interest and most of the principal, while the
other class will receive most of the interest and the remaining principal.
In extreme cases, one class will receive all of the interest ("interest
only" or "IO" class) while the other class will receive the entire
principal sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage loans or mortgage-backed
securities. A rapid
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rate of principal payments may adversely affect the yield to maturity of
IOs. Slower than anticipated prepayments of principal may adversely affect
the yield to maturity of a PO. The yields and market risk of interest only
and principal only stripped mortgage-backed securities, respectively, may
be more volatile than those of other fixed income securities, including
traditional mortgage-backed securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States
by foreign entities. Investment in these securities involve certain risks
which are not typically associated with investing in domestic securities.
See "FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are
sold at a discount from their face value. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. The amount
of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. The market value of zero coupon
securities may exhibit greater price volatility than ordinary debt
securities because a stripped security will have a longer duration than an
ordinary debt security with the same maturity. A portfolio's investments in
pay-in-kind, delayed and zero coupon bonds may require it to sell certain
of its portfolio securities to generate sufficient cash to satisfy certain
income distribution requirements.
These securities may include treasury securities that have had their
interest payments ("coupons") separated from the underlying principal
("corpus") by their holder, typically a custodian bank or investment
brokerage firm. Once the holder of the security has stripped or separated
corpus and coupons, it may sell each component separately. The principal or
corpus is then sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. Typically, the
coupons are sold separately or grouped with other coupons with like
maturity dates and sold bundled in such form. The underlying treasury
security is held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the
owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on Treasury securities
through the Federal Reserve book-entry record keeping system. Under a
Federal Reserve program known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities," a portfolio can record
its beneficial ownership of the coupon or corpus directly in the book-entry
record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay
the amount it borrowed (principal) from investors. Some debt securities,
however, are callable, meaning the issuer can repay the principal earlier,
on or after specified dates (call dates). Debt securities are most likely
to be called when interest rates are falling because the issuer
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can refinance at a lower rate, similar to a homeowner refinancing a
mortgage. The effective maturity of a debt security is usually its nearest
call date.
A portfolio that invests in debt securities has no real maturity. Instead,
it calculates its weighted average maturity. This number is an average of
the stated maturity of each debt security held by a portfolio, with the
maturity of each security weighted by the percentage of the assets of the
portfolio it represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes
in interest rates. It measures sensitivity more accurately than maturity
because it takes into account the time value of cash flows generated over
the life of a debt security. Future interest payments and principal
payments are discounted to reflect their present value and then are
multiplied by the number of years they will be received to produce a value
expressed in years -- the duration. Effective duration takes into account
call features and sinking fund prepayments that may shorten the life of a
debt security.
An effective duration of 4 years, for example, would suggest that for each
1% reduction in interest rates at all maturity levels, the price of a
security is estimated to increase by 4%. An increase in rates by the same
magnitude is estimated to reduce the price of the security by 4%. By
knowing the yield and the effective duration of a debt security, one can
estimate total return based on an expectation of how much interest rates,
in general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
A portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of a portfolio. If
left unattended, drifts in the average maturity of a portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of a portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security
increases the risk of depreciation due to future increases in market
interest rates. For these reasons, mortgage-backed securities may be less
effective than other types of U.S. government securities as a means of
"locking in" interest rates.
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Credit Rating
Coupon interest is offered to investors of debt securities as compensation
for assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer
higher yields than Treasury securities because their payment of interest
and complete repayment of principal is less certain. The credit rating or
financial condition of an issuer may affect the value of a debt security.
Generally, the lower the quality rating of a security, the greater the
risks that the issuer will fail to pay interest and return principal. To
compensate investors for taking on increased risk, issuers with lower
credit ratings usually offer their investors a higher "risk premium" in the
form of higher interest rates above comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an
adjustment to this "risk premium." Since an issuer's outstanding debt
carries a fixed coupon, adjustments to the risk premium must occur in the
price, which effects the yield to maturity of the bond. If an issuer
defaults or becomes unable to honor its financial obligations, the bond may
lose some or all of its value.
A security rated within the four highest rating categories by a rating
agency is called investment-grade because its issuer is more likely to pay
interest and repay principal than an issuer of a lower rated bond. Adverse
economic conditions or changing circumstances, however, may weaken the
capacity of the issuer to pay interest and repay principal. If a security
is not rated or is rated under a different system, the adviser may
determine that it is of investment-grade. The adviser may retain securities
that are downgraded, if it believes that keeping those securities is
warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit
worthy and/or highly leveraged (indebted) companies. A corporation may
issue a junk bond because of a corporate restructuring or other similar
event. Compared with investment-grade bonds, junk bonds carry a greater
degree of risk and are less likely to make payments of interest and
principal. Market developments and the financial and business condition of
the corporation issuing these securities influences their price and
liquidity more than changes in interest rates, when compared to
investment-grade debt securities. Insufficient liquidity in the junk bond
market may make it more difficult to dispose of junk bonds and may cause a
portfolio to experience sudden and substantial price declines. A lack of
reliable, objective data or market quotations may make it more difficult to
value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's
opinion, not an absolute standard of quality, and they do not reflect an
evaluation of market risk. The section "Bond Ratings" contains further
information concerning the ratings of certain rating agencies and their
significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time a portfolio buys it. A
rating agency may change its credit ratings at any time. The adviser
monitors the rating of the security and will take appropriate actions if a
rating agency reduces the security's rating. A portfolio is not obligated
to dispose of securities whose issuers subsequently are in default or which
are downgraded below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner,
to reduce transaction costs or to remain fully invested. They may also
invest in derivatives to protect it from broad fluctuations in market
prices, interest rates or foreign currency exchange rates. Investing in
derivatives for these purposes is known as "hedging." When hedging is
successful, the portfolio will have offset any depreciation in the value of
its portfolio securities by the appreciation in the value of the derivative
position. Although techniques other than the sale and purchase of
derivatives could be used to control the exposure of the portfolio to
market fluctuations, the use of derivatives may be a more effective means
of hedging this exposure.
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Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party
sells and the other party agrees to buy a specified amount of a financial
instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index,
interest rate, foreign exchange rate or other similar instrument. Agreeing
to buy the underlying financial information is called buying a futures
contract or taking a long position in the contract. Likewise, agreeing to
sell the underlying financial instrument is called selling a futures
contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal
agency. These contract markets standardize the terms, including the
maturity date and underlying financial instrument, of all futures
contracts.
Unlike other securities, the parties to a futures contract do not have to
pay for or deliver the underlying financial instrument until some future
date (the delivery date). Contract markets require both the purchaser and
seller to deposit "initial margin" with a futures broker, known as a
futures commission merchant, when they enter into the contract. Initial
margin deposits are typically equal to a percentage of the contract's
value. After they open a futures contract, the parties to the transaction
must compare the purchase price of the contract to its daily market value.
If the value of the futures contract changes in such a way that a party's
position declines, that party must make additional "variation margin"
payments so that the margin payment is adequate. On the other hand, the
value of the contract may change in such a way that there is excess margin
on deposit, possibly entitling the party that has a gain to receive all or
a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract calls for the actual
delivery of and payment for the underlying security, in many cases the
parties may close the contract early by taking an opposite position in an
identical contract. If the sale price upon closing out the contract is less
than the original purchase price, the person closing out the contract will
realize a loss. If the sale price upon closing out the contract is more
that the original purchase price, the person closing out the contract will
realize a gain. The opposite is also true. If the purchase price upon
closing out the contract is more than the original sale price, the person
closing out the contract will realize a loss. If the purchase price upon
closing out the contract is less than the original sale price, the person
closing out the contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
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Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the exercise
price plus the premium paid and related transaction costs. Otherwise, the
portfolio would realize either no gain or a loss on the purchase of the
call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
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The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract; or
. In the case of an index, the portfolio of securities that corresponds
to the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract
(in the case of a put option) at a fixed time and price. Upon exercise of
the option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put
option). If the option is exercised, the parties will be subject to the
futures contracts. In addition, the writer of an option on a futures
contract is subject to initial and variation margin requirements on the
option position. Options on futures contracts are traded on the same
contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e.,
the same exercise price and expiration date) as the option previously
purchased or sold. The difference between the premiums paid and received
represents the trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts
instead of selling or buying futures contracts. The portfolio may buy a put
option on a futures contract for the same reasons it would sell a futures
contract. It also may purchase such put options in order to hedge a long
position in the underlying futures contract. The portfolio may buy call
options on futures contracts for the same purpose as the actual purchase of
the futures contracts, such as in anticipation of favorable market
conditions.
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The portfolio may write a call option on a futures contract to hedge
against a decline in the prices of the instrument underlying the futures
contracts. If the price of the futures contract at expiration were below
the exercise price, the portfolio would retain the option premium, which
would offset, in part, any decline in the value of its portfolio
securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if the market price
declines, the portfolio would pay more than the market price for the
underlying instrument. The premium received on the sale of the put option,
less any transaction costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each
other, or in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For example, the
portfolio could construct a combined position whose risk and return
characteristics are similar to selling a futures contract by purchasing a
put option and writing a call option on the same underlying instrument.
Alternatively, the portfolio could write a call option at one strike price
and buy a call option at a lower price to reduce the risk of the written
call option in the event of a substantial price increase. Because combined
options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their customers,
as opposed to futures contracts which are traded only on exchanges
regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to
a commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a
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direct hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which
the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the
portfolio to assume the risk of fluctuations in the value of the currency
it purchases. Cross hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of
cash flows between two parties on specified dates (settlement dates), where
the cash flows are based on agreed-upon prices, rates, indices, etc. The
nominal amount on which the cash flows are calculated is called the
notional amount. Swaps are individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors, such as interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to
and from the portfolio. If a swap agreement calls for payments by the
portfolio, the portfolio must be prepared to make such payments when due.
In addition, if the counter-party's creditworthiness declined, the value of
a swap agreement would be likely to decline, potentially resulting in
losses.
Generally, swap agreements have a fixed maturity date that will be agreed
upon by the parties. The agreement can be terminated before the maturity
date only under limited circumstances, such as default by one of the
parties or insolvency, among others, and can be transferred by a party only
with the prior written consent of the other party. The portfolio may be
able to eliminate its exposure under a swap agreement either by assignment
or by other disposition, or by entering into an offsetting swap agreement
with the same party or a similarly creditworthy party. If the counter-party
is unable to meet its obligations under the contract, declares bankruptcy,
defaults or becomes insolvent, the portfolio may not be able to recover the
money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements
according to guidelines established by the SEC. If the portfolio enters
into a swap agreement on a net basis, it will segregate assets with a daily
value at least equal to the excess, if any, of the portfolio's accrued
obligations under the swap agreement over the accrued amount the portfolio
is entitled to receive under the agreement. If the portfolio enters into a
swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the portfolio's accrued obligations under
the agreement.
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Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in
return for a specified interest rate. By entering into an equity index
swap, for example, the index receiver can gain exposure to stocks making up
the index of securities without actually purchasing those stocks. Equity
index swaps involve not only the risk associated with investment in the
securities represented in the index, but also the risk that the performance
of such securities, including dividends, will not exceed the return on the
interest rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of
interest rate cash flow on specified dates in the future. Some of the
different types of interest rate swaps are "fixed-for floating rate swaps,"
"termed basis swaps" and "index amortizing swaps." Fixed-for floating rate
swap involve the exchange of fixed interest rate cash flows for floating
rate cash flows. Termed basis swaps entail cash flows to both parties based
on floating interest rates, where the interest rate indices are different.
Index amortizing swaps are typically fixed-for floating swaps where the
notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the portfolio enters into a swap where it agrees
to exchange a floating rate of interest for a fixed rate of interest, the
portfolio may have to pay more money than it receives. Similarly, if the
portfolio enters into a swap where it agrees to exchange a fixed rate of
interest for a floating rate of interest, the portfolio may receive less
money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in
which one party agrees to make interest rate payments in one currency and
the other promises to make interest rate payments in another currency. A
portfolio may enter into a currency swap when it has one currency and
desires a different currency. Typically the interest rates that determine
the currency swap payments are fixed, although occasionally one or both
parties may pay a floating rate of interest. Unlike an interest rate swap,
however, the principal amounts are exchanged at the beginning of the
contract and returned at the end of the contract. Changes in foreign
exchange rates and changes in interest rates, as described above may
negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level. The seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these
transactions themselves entail certain other risks. For example,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance of the portfolio
than if it had not entered into any derivatives transactions. Derivatives
may magnify the portfolio's gains or losses, causing it to make or lose
substantially more than it invested.
When used for hedging purposes, increases in the value of the securities
the portfolio holds or intends to acquire should offset any losses incurred
with a derivative. Purchasing derivatives for purposes other than hedging
could expose the portfolio to greater risks.
Correlation of Prices
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The portfolio's ability to hedge its securities through derivatives depends
on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant securities. In
the case of poor correlation, the price of the securities the portfolio is
hedging may not move in the same amount, or even in the same direction as
the hedging instrument. The adviser will try to minimize this risk by
investing only in those contracts whose behavior it expects to resemble the
portfolio securities it is trying to hedge. However, if the portfolio's
prediction of interest and currency rates, market value, volatility or
other economic factors is incorrect, the portfolio may lose money, or may
not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence:
. current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an
instrument stops; and
. differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the participation
of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based
on a broad market index. Since narrower indices are made up of a smaller
number of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration
in the issuer's creditworthiness. Because the value of the portfolio's
foreign-denominated investments changes in response to many factors other
than exchange rates, it may not be possible to match the amount of currency
options and futures to the value of the portfolio's investments precisely
over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio
can terminate it only by entering into a closing purchase or sale
transaction. Moreover, a portfolio may close out a futures contract only on
the exchange the contract was initially traded. Although a portfolio
intends to purchase options and futures only where there appears to be an
active market, there is no guarantee that such a liquid market will exist.
If there is no secondary market for the contract, or the market is
illiquid, the portfolio may not be able to close out its position. In an
illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time
and price) under a variety of market conditions. For example:
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. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of
an exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can
change during a single trading day. Daily trading limits establish the
maximum amount that the price of a derivative may vary from the settlement
price of that derivative at the end of trading on the previous day. Once
the price of a derivative reaches this value, a portfolio may not trade
that derivative at a price beyond that limit. The daily limit governs only
price movements during a given day and does not limit potential gains or
losses. Derivative prices have occasionally moved to the daily limit for
several consecutive trading days, preventing prompt liquidation of the
derivative.
Because of the low margin deposits required upon the opening of a
derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative
may result in an immediate and substantial loss (as well as gain) to the
portfolio and it may lose more than it originally invested in the
derivative.
If the price of a futures contract changes adversely, the portfolio may
have to sell securities at a time when it is disadvantageous to do so to
meet its minimum daily margin requirement. The portfolio may lose its
margin deposits if a broker-dealer with whom it has an open futures
contract or related option becomes insolvent or declares bankruptcy.
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EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other respects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a
fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
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Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits
of owning a company, such investors must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs;
. Changes in financial market conditions that are relatively unrelated to
the company or its industry, such as changes in interest rates,
currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the
over-the-counter market and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities
of small and medium capitalization companies are likely to be less liquid,
and subject to more abrupt or erratic market movements, than securities of
larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
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. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities. EDRs are
similar to ADRs, except that they are typically issued by European Banks or
trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank
for Reconstruction and Development (World Bank) and the International
Finance Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. Investments in these investment funds are subject
to the provisions of the 1940 Act. Shareholders of a UAM Fund that invests
in such investment funds will bear not only their proportionate share of
the expenses of the UAM Fund (including operating expenses and the fees of
the adviser), but also will bear indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may trade
at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect an investment
in foreign securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt;
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. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and
economic conditions;
. The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit the portfolio's ability to
invest in a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may restrict
the ability of foreign investors to repatriate their investment income
and capital gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
applicable to United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and
erratic price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays
and increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of securities denominated in that currency. Some of the factors that
may impair the investments denominated in a foreign currency are:
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. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and
their exchange rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces;
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis;
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while
the markets for the underlying currencies remain open, certain markets
may not always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to
recover a portion of these taxes, the portion that cannot be recovered will
reduce the income the portfolio receives from its investments. The
portfolio does not expect such foreign withholding taxes to have a
significant impact on performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries;
and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain
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separate currencies in any form. Until then, however, each country and
issuers within each country are free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that adopt the Euro in all aspects of the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
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A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by a portfolio. Like other shareholders, each
portfolio would pay its proportionate share of those fees. Consequently,
shareholders of a portfolio would pay not only the management fees of the
portfolio, but also the management fees of the investment company in which
the portfolio invests. A portfolio may invest up to 10% of its total assets
in the securities of other investment companies, but may not invest more
than 5% of its total assets in the securities of any one investment company
or acquire more than 3% of the outstanding securities of any one investment
company.
The SEC has granted an order that allows a portfolio to invest the greater
of 5% of its total assets or $2.5 million in the UAM DSI Money Market
Portfolio, provided that the investment is:
. For cash management purposes;
. Consistent with a portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
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In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolios normally use repurchase agreements to
earn income on assets that are not invested.
When a portfolio enters into a repurchase agreement it will:
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. Pay for the underlying securities only upon physically receiving them
or upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price
of the repurchase agreement rises above the value of the underlying
security (i.e., it will require the borrower to "mark to the market" on
a daily basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, a portfolio's right to sell
the security may be restricted. In addition, the value of the security
might decline before a portfolio can sell it and a portfolio might incur
expenses in enforcing its rights.
RESTRICTED SECURITIES
- --------------------------------------------------------------------------------
The portfolios may purchase restricted securities that are not registered
for sale to the general public but which are eligible for resale to
qualified institutional investors under Rule 144A of the Securities Act of
1933. Under the supervision of the Board, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided
that a dealer or institutional trading market in such securities exists,
these restricted securities are not treated as illiquid securities for
purposes of the portfolio's investment limitations. The price realized from
the sales of these securities could be more or less than those originally
paid by a portfolio or less than what may be considered the fair value of
such securities.
SECURITIES LENDING
- --------------------------------------------------------------------------------
A portfolio may lend a portion of its total assets to broker- dealers or
other financial institutions. It may then reinvest the collateral it
receives in short-term securities and money market funds. When a portfolio
lends its securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value
of the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit
issued by a domestic U.S. bank or securities issued or guaranteed by
the U. S. government;
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements.
When the portfolio lends securities, there is a risk that the borrower will
become financially unable to honor its contractual obligations. If this
happens, the portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, a portfolio contracts to purchase securities for a fixed price
at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or
24
<PAGE>
deliver securities until a later date. Typically, no income accrues on
securities a portfolio has committed to purchase before the securities are
delivered, although the portfolio may earn income on securities it has in a
segregated account. A portfolio will only enter into these types of
transactions with the intention of actually acquiring the securities, but
may sell them before the settlement date.
A portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When a portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, a portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because a portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
A portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. A portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
INVESTMENT POLICIES OF THE PORTFOLIOS
A portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, a
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following investment limitations are fundamental, which means a
portfolio cannot change them without approval by the vote of a majority of
the outstanding voting securities of the portfolio, as defined by the 1940
Act.
Disciplined Value, Limited Maturity Bond and Money Market Portfolios
Each portfolio will not:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any agency or instrumentality
thereof).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest for the purpose of exercising control over management of any
company.
. Invest in commodities except that each portfolio may invest in futures
contracts and options to the extent that not more than 5% of a
portfolio's assets are required as deposit to secure obligations under
futures contracts.
. Invest more than 25% of the value of its total assets in companies
within a single industry; however, there are no limitation on
investments made in instruments issued or guaranteed by the U.S.
government and its agencies or instrumentalities or instruments issued
by U.S. banks when a portfolio adopts a temporary defensive position.
25
<PAGE>
. Invest more than 5% of its assets at the time of purchase in the
securities of companies that have (with predecessors) a continuous
operating history of less than 3 years.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1)
making any permitted borrowings, mortgages or pledges, or (2) entering
into options and futures (except DSI Money Market Portfolio),or
entering repurchase transactions.
. Make loans except (1) by purchasing bonds, debentures or similar
obligations which are publicly distributed, (including repurchase
agreements provided, that repurchase agreements maturing in more than
seven days, together with securities which are not readily marketable,
will not exceed 10% of a portfolio's net assets), and (2) by lending
its portfolio securities to banks, brokers, dealers and other
financial institutions so long as these loans are not inconsistent
with the 1940 Act or the rules and regulations or interpretations of
the SEC.
. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total
gross assets.
. Purchase or retain securities of an issuer if those officers and Board
members of the Fund or its investment adviser owning more than 1/2of
1% of such securities together own more than 5% of such securities.
. Purchase on margin or sell short, except as permitted herein.
. Purchase or sell real estate, although it may purchase or sell
securities of companies which deal in real estate and may purchase and
sell securities which are secured by interests in real estate.
. Underwrite the securities of other issuers or invest more than an
aggregate of 10% of the assets of the portfolio, determined at the
time of investment, in securities subject to legal or contractual
restrictions on resale or securities for which there are no readily
available markets, including repurchase agreements having maturities
of more than seven days.
. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
DSI Balanced Portfolio
The portfolio will not:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the government of the U.S. or any agency or
instrumentality thereof).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3% of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in commodities except that the portfolio may invest in futures
contracts and options to the extent that not more than 5% of the
portfolio's assets are required as deposit to secure obligations under
futures contracts.
. Invest more than 25% of the value of its total assets in companies
within a single industry; however, there are no limitation on
investments made in instruments issued or guaranteed by the U.S.
government and its agencies or instrumentalities or instruments issued
by U.S. banks when a portfolio adopts a temporary defensive position.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the portfolio from (1)
making any permitted borrowings, mortgages or pledges, or (2) entering
into options and futures, or (3) entering repurchase transactions.
. Make loans except (1) by purchasing bonds, debentures or similar
obligations which are publicly distributed, (including repurchase
agreements provided, that repurchase agreements maturing in more than
seven days, together
26
<PAGE>
with securities which are not readily marketable, will not exceed 15%
of the portfolio's net assets), and (2) by lending its portfolio
securities to banks, brokers, dealers and other financial institutions
so long as these loans are not inconsistent with the 1940 Act or the
rules and regulations or interpretations of the SEC.
. Purchase additional securities when borrowings exceed 5% of total
gross assets.
. Purchase or sell real estate, although it may purchase or sell
securities of companies which deal in real estate and may purchase and
sell securities which are secured by interests in real estate.
. Underwrite the securities of other issuers or invest more than an
aggregate of 15% of the assets of the portfolio, determined at the
time of investment, in securities subject to legal or contractual
restrictions on resale or securities for which there are no readily
available markets, including repurchase agreements having maturities
of more than seven days.
DSI Small Cap Value Portfolio
The portfolio will not:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any of its agencies or
instrumentalities.
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3% of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies when the portfolio adopts a temporary defensive position.
. Issue senior securities, as defined in the 1940 Act except that this
restriction shall not be deemed to prohibit the portfolio from (1)
making any permitted borrowings, mortgages or pledges, or (2) entering
repurchase transactions.
. Make loans except (1) by purchasing bonds, debentures or similar
obligations which are publicly distributed, (including repurchase
agreements provided, that repurchase agreements maturing in more than
seven days, together with securities which are not readily marketable,
will not exceed 15% of the portfolio's net assets), and (2) by lending
its portfolio securities to banks, brokers, dealers and other
financial institutions so long as these loans are not inconsistent
with the 1940 Act or the rules and regulations or interpretations of
the SEC.
. Purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal
in real estate and may purchase and sell securities which are secured
by interests in real estate.
. Underwrite the securities of other issuers.
NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means a portfolio may
change them without shareholder approval.
Balanced Portfolio
The portfolio will not:
27
<PAGE>
. Invest in stock or bond futures and/or options on futures unless not
more than 20% of the portfolio's assets are invested in stock or bond
futures and options on futures.
. Invest more than 5% of its assets at the time of purchase in the
securities of companies that have (with predecessors) a continuous
operating history of less than 3 years.
. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value.
. Purchase on margin or sell short, except as permitted herein.
Disciplined Value Portfolio
The portfolios will not:
. Invest in stock or bond futures and/or options on futures unless not
more than 20% of the portfolio's assets are invested in stock or bond
futures and options on futures.
Limited Maturity Bond Portfolio
The portfolios will not:
. Invest in stock or bond futures and/or options on futures unless not
more than 20% of the portfolio's assets are invested in stock or bond
futures and options on futures.
. Invest more than 10% of the portfolio's assets in securities rated Ba
or B by Moody's or BB or B by S&P (or which, in the adviser's opinion
of comparable quality or better), preferred stocks and convertible
securities. The adviser reserves the right to retain securities which
are downgraded below investment grade.
Small Cap Value Portfolio
The portfolio will not:
. invest in stock or bond futures and/or options on futures unless (1)
not more than 5% of the portfolio's assets are required as deposit to
secure obligations under such futures and/or options on futures
contracts, and (2) not more than 20% of the portfolio's assets are
invested in stock or bond futures and options on futures.
. invest more than 5% of its assets at the time of purchase in the
securities of companies that have (with predecessors) a continuous
operating history of less than 3 years.
. pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value.
. purchase on margin or sell short, except as permitted herein.
. purchase additional securities when borrowings exceed 5% of total
gross assets.
. invest more than an aggregate of 15% of the net assets of the
portfolio, determined at the time of investment, in securities subject
to legal or contractual restrictions on resale or securities for which
there are no readily available markets.
MANAGEMENT OF THE FUND
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to
execute policies the board has formulated. The Fund pays each board member
who is not also an officer or affiliated person (independent board member)
a $150 quarterly retainer fee per active portfolio and a $2,000 meeting
fee. In addition, the Fund reimburses each independent board member for
travel and other expenses
28
<PAGE>
incurred while attending board meetings. The $2,000 meeting fee and expense
reimbursements are aggregated for all of the board members and allocated
proportionately among the portfolios of the UAM Funds Complex. The Fund
does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's
officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act.
Mr. English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in
the UAM Funds Complex. However, the Fund does not believe that the
relationship is a material business relationship, and, therefore, does not
consider him to be an "interested person" of the Fund. If these
circumstances change, the Board will determine whether any action is
required to change the composition of the Board.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
Position From the Fund Complex as of
Name, Address, with Principal Occupations During the as of October October 31,
DOB Fund Past 5 years 31, 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management $7,137 $10,625
College Road-- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company, Inc.; President of Bennett
1/26/29 Management Company from 1988 to 1993.
------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund $7,137 $10,625
1250 24th St., NW Member since January 1999; Vice President for
Washington, DC 20037 Finance and Administration and Treasurer
8/14/51 of Radcliffe College from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief $7,137 $10,625
100 King Street West Member Administrative Officer of Philip Services
P.O. Box 2440, LCD-1 Corp.; Formerly, a Partner in the
Hamilton Ontario, Philadelphia office of the law firm
Canada L8N-4J6 Dechert Price & Rhoads and a Director of
4/21/42 Hofler Corp.
------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of $7,137 $10,625
16 West Madison Street Member Broventure Company, Inc.; Chairman of the
Baltimore, MD 21201 Board of Chektec Corporation and Cyber
8/5/48 Scientific, Inc.
------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, 0 0
211 Congress Street Member Inc. since March 1999; Vice President UAM
Boston, MA 02110 Trust Company since January 1996;
2/24/53 Principal of UAM Fund Distributors, Inc.
since December 1995; Vice President of
UAM Investment Services, Inc. from
January 1996 to March 1999 and a Director
and Chief Operating Officer of CS First
Boston Investment Management from
1993-1995.
------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a 0 0
One International Place Member; Director of United Asset Management
Boston, MA 02110 President Corporation; Director, Partner or Trustee
3/21/35 and of each of the Investment Companies of
Chairman the Eaton Vance Group of Mutual Funds.
------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of 0 0
One Financial Center Member Dewey Square Investors Corporation since
Boston, MA 02111 1988; Director and Chief Executive
7/1/43 Officer of H.T. Investors, Inc., formerly
a subsidiary of Dewey Square.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
Position From the Fund Complex as of
Name, Address, with Principal Occupations During the as of October October 31,
DOB Fund Past 5 years 31, 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William H. Park Vice Executive Vice President and Chief 0 0
One International Place President Financial Officer of United Asset
Boston, MA 02110 Management Corporation.
9/19/47
------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer 0 0
211 Congress Street of the Fidelity Group of Mutual Funds
Boston, MA 02110 from 1991 to 1995; held various other
7/4/51 offices with Fidelity Investments from
November 1990 to March 1995.
------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase
Boston, MA 02110 Global Fund Services Company from 1995 to
9/18/63 1996; Senior Manager of Deloitte & Touche
LLP from 1985 to 1995,
------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI 0 0
SEI Investments Treasurer Investments; Senior Manager at Arthur
One Freedom Valley Rd. Andersen prior to 1994.
Oaks, PA 19456
12/17/63
</TABLE>
PRINCIPAL SHAREHOLDERS
As of February 1, 2000, the following persons or organizations held of
record or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned Portfolio Class
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BSC As Agent For Crane & Excelsior Company Profit 99.39% DSI Balanced Institutional
Sharing Plan Portfolio Class
1375 Peachtree St. Suite 300 Shares
Atlanta, GA 30309
------------------------------------------------------------------------------------------------------------------------
Jupiter & CO 53.62% DSI Institutional
c/o Investors Bank & Trust CO Disciplined Class
PO Box 9130 Value Shares
Boston, MA 02117-9130 Portfolio
------------------------------------------------------------------------------------------------------------------------
Ocsar E. Churchill & Peter M. Haslam and 8.20% DSI Institutional
William F. Kinney TR Disciplined Class
FBO Union Bank Pension Trust Value Shares
PO Box 667 Portfolio
Morrisville, VT 05661-0667
------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co Tr 6.35% DSI Institutional
FBO Cherokee Nation 401K Plan Disciplined Class
c/o Mutual Funds/UAM Value Shares
PO Box 8971 Portfolio
Wilmington, DE 19899-8971
------------------------------------------------------------------------------------------------------------------------
William Park & Joseph R. Ramrath TR 5.34% DSI Institutional
FBO DSI HT UAM PSP 401K Disciplined Class
One Financial Center, 24/th/ FL Value Shares
Boston, MA 02111-2621 Portfolio
------------------------------------------------------------------------------------------------------------------------
Union Bank of California TR 5.28% DSI Institutional
FBO Select Benefit Community Bank Disciplined Class
PO Box 85484 Value Shares
San Diego, CA 92186-5484 Portfolio
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wilmington Trust CO TR 99.20% DSI Institutional
FBO Cellular Vision of New York Disciplined Service
401K Plan Value Class
c/o Mutual Funds/UAM Portfolio Shares
PO Box 8971
Wilmington, DE 19899-8971
- ----------------------------------------------------------------------------------------------------------------------
Jupiter & CO 77.01% DSI Limited Institutional
c/o Investors Bank & Trust CO Maturity Bond Class
PO Box 9130 Portfolio Shares
Boston, MA 02117-9130
- ----------------------------------------------------------------------------------------------------------------------
Ocsar E. Churchill & Peter M. Haslam and 5.93% DSI Limited Institutional
William F. Kinney TR Maturity Bond Class
FBO Union Bank Pension Trust Portfolio Shares
PO Box 667
Morrisville, VT 05661-0667
- ----------------------------------------------------------------------------------------------------------------------
Saturn & CO 52.48% DSI Money Institutional
c/o Investors Bank and Trust Market Class
PO Box 9130 FPG90 Portfolio Shares
Boston, MA 02117-9130
- ----------------------------------------------------------------------------------------------------------------------
UMBSC & Co 11.38% DSI Money Institutional
FBO Interstate Brands Conservative Growth Market Class
PO Box 419175 Portfolio Shares
Kansas City, MO 64141-6175
- ----------------------------------------------------------------------------------------------------------------------
South Alaska Defined Contribution Pension Plan 7.57% DSI Money Institutional
Attn: Royce R. Rock Market Class
PO Box 214266 Portfolio Shares
Anchorage, AK 99524-1266
- ----------------------------------------------------------------------------------------------------------------------
Jupiter & CO 85.90% DSI Small Cap Institutional
c/o Investors Bank & Trust CO Value Class
PO Box 9130 Portfolio Shares
Boston, MA 02117-9130
- ----------------------------------------------------------------------------------------------------------------------
Fleet National Bank CUST 5.64% DSI Small Cap Institutional
FBO Diocesan Investment Trust Value Class
Episcopal Diocese of RI Portfolio Shares
PO Box 92800
Rochester, NY 14092-8900
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolios.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Dewey Square Investors Corporation, located at One Financial Center, Boston,
Massachusetts 02111, is the investment adviser to the portfolios. The adviser
manages and supervises the investment of the portfolio's assets on a
discretionary basis. The adviser, an affiliate of United Asset Management
Corporation, has provided investment management services to corporations,
foundations, endowments, pension and profit sharing plans, trusts, estates and
other institutions and individuals since 1984.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
31
<PAGE>
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds Complex.
Portfolio Management
Teams of the adviser's investment professionals are primarily responsible for
the day-to-day management of the portfolios. Listed below are the members of
each of those teams and a brief description of their business experience.
Small Cap Value Portfolio
Name & Title Experience
------------------------------------------------------------------------------
Ronald L. McCullough Mr. McCullough is the senior equity strategist
CFA and is responsible for all equity investments. He
Managing Director, Equity has 29 years of investment experience and has been
Investing a Managing Director of the adviser since before
1994. Prior to joining the adviser, Mr. McCullough
was Senior Portfolio Manager and a member of the
Trust Investment Committee at Bank of Boston's
Institutional Investment Division. He has a BA
from Harvard College and is a member of the Boston
Security Analysts Society and the Institute of
Chartered Financial Analysts (CFA).
------------------------------------------------------------------------------
Robert S. Stephenson, Mr. Stephenson has 26 years of experience in the
CPA investment business. He joined the adviser in
Senior Portfolio Manager, 1991 and has been a Portfolio Manager since
Equity before 1994. He was most recently at The Putnam
Management Company from 1978 to 1990 where he
managed the Putnam Option Trust. He graduated from
Rochester Institute of Technology with a BS and
earned an MBA from Columbia University. Mr.
Stephenson has co-managed the DSI Disciplined
Value Portfolio since April 1993.
------------------------------------------------------------------------------
Charles Glovsky, CFA Mr. Glovsky joined the adviser as a Senior
Senior Portfolio Manager, Portfolio Manager in 1998. Most recently, he was a
Equity Managing Partner of Glovsky-Brown Capital
Management, a firm he co-founded that specialized
in small and mid-capitalization stocks. Prior to
that position, he spent nine years as a portfolio
manager and Senior Vice President at State Street
Research where he was responsible for that firm's
small cap stock portfolios. He has also worked as
an analyst for Alex Brown & Sons and Eppler,
Geurin & Turner. He received a B.A. from Dartmouth
College in 1975 and an M.B.A. from Stanford
University. He has 19 years of investment
experience and is a member of the Boston Security
Analysts Society.
Disciplined Value Portfolio
Name & Title Experience
- --------------------------------------------------------------------------------
Ronald L. McCullough Mr. McCullough co-manages the Disciplined Value
CFA Portfolio with Mr. Stephenson. You can Find Mr.
Managing Director, Equity McCullough's biography above under the Small Cap
Investing Value Portfolio.
- --------------------------------------------------------------------------------
Robert S. Stephenson, Mr. Stephenson co-manages the Disciplined Value
CPA Portfolio with Mr. McCullough. You can Find Mr.
Senior Portfolio Manager, Stephenson's biography above under the Small Cap
Equity Value Portfolio.
32
<PAGE>
Limited Maturity Bond and Money Market Portfolios
Name & Title Experience
- ------------------------------------------------------------------------------
Frederick C. Meltzer, PHD Mr. Meltzer joined the adviser as a Senior
Senior Portfolio Manager, Portfolio Manager in 1995. Prior to that he was
Fixed-Income Managing Director of Fixed Income at World Asset
Management. Previously, he held positions as
Senior Manager of Fixed Income at PanAgora Asset
Management and Senior Fixed Income Portfolio
Manager at The Boston Company. He has also held
positions as Director of Research for the Farm
Credit Banks Funding Corporation, Fixed Income
Strategist at Chase Investors, and a staff
economist at the Federal Reserve Bank of New York.
He has 24 years of investment experience. Mr.
Meltzer holds a MA in Economics from John Hopkins
University and a Ph.D. in Economics from the
University of Virginia.
- --------------------------------------------------------------------------------
David J. Thompson, CFA Mr. Thompson joined the adviser in 1997 as a
Senior Portfolio Manager, Portfolio Manager. He was promoted to Senior
Fixed-Income Portfolio Manager in May 1998. Prior to joining
Dewey Square, Mr. Thompson was a member of Lord
Abbett & Company's High Grade Fixed Income
Department. In his role as a Fixed Income Manager
there, Mr. Thompson was responsible for managing
$800 million of assets for a variety of
institutional clients including a 2(a)7 money
market mutual fund. Earlier in his career, David
spent three years at Brown Brothers Harriman &
Company as an Assistant Portfolio Manager in the
Global Fixed Income Department. Mr. Thompson has
eight years of investment experience. He earned a
BS degree in finance and economics from Manhattan
College. Mr. Thompson earned his CFA in 1995.
Balanced Portfolio
Name & Title Experience
- --------------------------------------------------------------------------------
Ronald L. McCullough Mr. McCullough co-manages the equity portion of
CFA DSI Balanced Portfolio with Ms. Dewitz. You can
Managing Director, Equity Find Mr. McCullough 's biography above under DSI
Investing Small Cap Value Portfolio.
- --------------------------------------------------------------------------------
Eva S. Dewitz Ms. Dewitz is part of the team that founded the
Senior Portfolio Manager, adviser in 1984 and has been a Senior Portfolio
Equity Manager since before 1994. Prior to the formation
of the adviser, she was a Portfolio Manager and
Research Analyst for the Bank of Boston's
Institutional Investment Division, which she
joined in 1970. She has 28 years of investment
experience. Ms. Dewitz is a member of the Boston
Security Analysts Society. She holds a BA from
Smith College and an MBA from Northeastern
University.
- --------------------------------------------------------------------------------
David J. Thompson, CFA Mr. Thompson co-manages the debt portion of the
Senior Portfolio Manager, DSI Balanced Portfolio with Mr. Clancy. You can
Fixed-Income find Mr. Thompson's biography above under DSI
limited Maturity Bond and Money Market Portfolios.
Robert P. Clancy Mr. Clancy joined the adviser as a Senior
Senior Portfolio Manager, Portfolio Manager in 1994. Prior to that, he was a
Fixed-Income Vice President at Standish, Ayer & Wood
responsible for the management of institutional
bond portfolios, synthetic GICs and quantitative
research. Previously, he worked as a Vice
President at First Boston Company working
primarily with insurance company and structured
bond portfolios. Prior to that, Mr. Clancy worked
for State Street Bank and John Hancock Mutual Life
Insurance Company. He has 18 years of investment
experience and is a Fellow of the Society of
Actuaries and a recipient of the Halmstad Prize
for his research paper on options on bonds. Mr.
Clancy holds a BS from Brown University. Mr.
Clancy co-manages the debt portion of the DSI
Balanced Portfolio with Mr. Thompson.
33
<PAGE>
Other Members of the Adviser's Team
Name & Title Experience
- --------------------------------------------------------------------------------
Peter M. Whitman, Jr. Mr. Whitman is part of the team that founded the
President, Chief adviser in 1984. He was appointed President in
Investment Officer and 1988 and was previously Managing Director of Fixed
Managing Director Fixed Income, a position he held for seven years. Prior
Income to the formation of Dewey Square, he served as
Head of Fixed Income for the Bank of Boston's
Institutional Investment Division. He joined the
Bank of Boston in 1971 as a Credit Analyst and was
appointed head of Fixed Income Research in 1975.
He has 30 years of investment experience. Mr.
Whitman holds a BA from Harvard College and an MBA
from the New York University Graduate School of
Business. Mr. Whitman also serves as a
Director/Trustee of the UAM Funds, which are
mutual funds managed by various United Asset
Management affiliates. He is a member and former
Director of the Boston Security Analysts Society
and a member and former President of the Boston
Economics Club.
- --------------------------------------------------------------------------------
William M. Sloan, Jr. Mr. Sloan joined the adviser as a Senior Portfolio
Senior Portfolio Manager, Manager in 1995 after the consolidation of HT
Equity Investors with the adviser. He was President of HT
Investors from 1988 through 1995. From 1985
through 1988 he managed the U.S. Equity Portfolio
for Sun Life of Canada. Prior to that he held
positions as a Portfolio Manager for HT Investors
and Rhode Island Hospital Trust National Bank. Mr.
Sloan has 28 years of investment experience. He
holds a BA from Princeton University
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Fund has filed each agreement with the SEC as part of
its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of a portfolio's assets;
. Continuously reviews, supervises and administers the investment program of
a portfolio; and
. Determines what portion of a portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Investment Advisory Agreement, (2) reckless disregard by the adviser of
its obligations and duties under the Investment Advisory Agreement, or (3) a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
34
<PAGE>
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Board Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, each portfolio pays its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of the
portfolio. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that a portfolio pays in any given year may
be different from the rate set forth in its contract with the adviser. For the
last three fiscal years, the portfolios paid the following in management fees
to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Investment Advisory Fees Total Investment Advisory
Paid Waived Fees
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Value Portfolio
1999 $121,772 $14,326 $107,446
----------------------------------------------------------------------------------------------------------------------
1998 N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------
Disciplined Value Portfolio
1999 $511,433 $0 $511,433
----------------------------------------------------------------------------------------------------------------------
1998 $737,133 $0 $737,133
----------------------------------------------------------------------------------------------------------------------
1997 $578,815 $0 $578,815
----------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
1999 $167,557 $4,379 $163,178
----------------------------------------------------------------------------------------------------------------------
1998 $102,428 $25,681 $76,747
----------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
1999 $132,944 $0 $132,944
----------------------------------------------------------------------------------------------------------------------
1998 $155,198 $0 $155,198
----------------------------------------------------------------------------------------------------------------------
1997 $141,248 $0 $141,248
----------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
1999 $466,029 $256,316 $209,713
----------------------------------------------------------------------------------------------------------------------
1998 $273,545 $336,812 $0
----------------------------------------------------------------------------------------------------------------------
1997 $333,241 $426,538 $0
</TABLE>
35
<PAGE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services, and any amounts it may receive under a Service
and Distribution Plan are passed through in their entirety to third parties.
UAMFDI, an affiliate of UAM, is located at 211 Congress Street, Boston,
Massachusetts 02110.
SERVICE AND DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan (the
"Plans") for the portfolios' Institutional Service Class Shares pursuant to
Rule 12b-1 under the 1940 Act.
Shareholder Servicing Plan
The Shareholder Servicing Plan (Service Plan) permits the Fund to compensate
broker-dealers or other financial institutions (Service Agents) that have
agreed with UAMFDI to provide administrative support services to Institutional
Service Class shareholders that are their customers. Under the Service Plan,
Institutional Service Class Shares may pay service fees at the maximum annual
rate of 0.25 of the average daily net asset value of such shares held by the
Service Agent for the benefit of its customers. The Fund pays these fees out
of the assets allocable to a portfolio's Institutional Service Class Shares to
UAMFDI, to the Service Agent directly or through UAMFDI. Each item for which a
payment may be made under the Service Plan constitutes personal service and/or
shareholder account maintenance and may constitute an expense of distributing
Institutional Service Class Shares as the SEC construes such term under Rule
12b-1. Services for which Institutional Service Class Shares may compensate
Service Agents include:
. Acting as the sole shareholder of record and nominee for beneficial owners.
. Maintaining account records for such beneficial owners of the Fund's
shares.
. Opening and closing accounts.
. Answering questions and handling correspondence from shareholders about
their accounts.
. Processing shareholder orders to purchase, redeem and exchange shares.
. Handling the transmission of funds representing the purchase price or
redemption proceeds.
. Issuing confirmations for transactions in the Fund's shares by
shareholders.
. Distributing current copies of prospectuses, statements of additional
information and shareholder reports.
. Assisting customers in completing application forms, selecting dividend and
other account options and opening any necessary custody accounts.
. Providing account maintenance and accounting support for all transactions.
. Performing such additional shareholder services as may be agreed upon by
the Fund and the Service Agent, provided that any such additional
shareholder services must constitute a permissible non-banking activity in
accordance with the then current regulations of, and interpretations
thereof by, the Board of Governors of the Federal Reserve System, if
applicable.
Rule 12b-1 Distribution Plan
The Distribution Plan permits a portfolio to pay UAMFDI or others for certain
distribution, promotional and related expenses involved in marketing its
Institutional Service Class Shares. Under the Distribution Plan, Institutional
Service Class Shares may pay distribution fees at the maximum annual rate of
0.75% of the average daily net asset value of such shares held by the Service
Agent for the benefit of its customers. These expenses include, among other
things:
36
<PAGE>
. Advertising the availability of services and products.
. Designing materials to send to customers and developing methods of making
such materials accessible to customers.
. Providing information about the product needs of customers.
. Providing facilities to solicit Fund sales and to answer questions from
prospective and existing investors about the Fund.
. Receiving and answering correspondence from prospective investors,
including requests for sales literature, prospectuses and statements of
additional information.
. Displaying and making available sales literature and prospectuses.
. Acting as liaison between shareholders and the Fund, including obtaining
information from the Fund and providing performance and other information
about the Fund.
In addition, the Institutional Service Class Shares may make payments directly
to other unaffiliated parties, who either aid in the distribution of their
shares or provide services to the Class.
Fees Paid under the Service and Distribution Plans
The Plans permit Institutional Service Class shares to pay distribution and
service fees at the maximum annual rate of 1.00% of the class' average daily
net assets for the year. The Fund's governing board has limited the amount the
Institutional Service Class may pay under the Plans to 0.25% of the class'
average daily net assets for the year, and may increase such amount to the
plan maximum at any time.
The Fund will not reimburse the Distributor or others for distribution
expenses incurred in excess of the amount permitted by the Plans.
Subject to seeking best price and execution, the Fund may buy or sell
portfolio securities through firms that receive payments under the Plans.
UAMFDI, at its own expense, may pay dealers for aid in distribution or for aid
in providing administrative services to shareholders.
Distribution Plan Expenses
------------------------------------------------------------------------------
Disciplined Value Portfolio
1999 $16,087
Approving, Amending and Terminating the Fund's Distribution Arrangements
Shareholders of each portfolio have approved the Plans. The Plans also were
approved by the governing board of the Fund, including a majority of the
members of the board who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plans (Plan
Members), by votes cast in person at meetings called for the purpose of voting
on these Plans.
Continuing the Plans
The Plans continue in effect from year to year so long as they are approved
annually by a majority of the Fund's board members and its Plan Members. To
continue the Plans, the board must determine whether such continuation is in
the best interest of the Institutional Service Class shareholders and that
there is a reasonable likelihood of the Plans providing a benefit to the
Class. The Fund's board has determined that the Fund's distribution
arrangements are likely to benefit the Fund and its shareholders by enhancing
the Fund's ability to efficiently service the accounts of its Institutional
Service Class shareholders.
37
<PAGE>
Amending the Plans
A majority of the Fund's governing board and a majority of its the Plan
Members must approve any material amendment to the Plans. Likewise, any
amendment materially increasing the maximum percentage payable under the Plans
must be approved by a majority of the outstanding voting securities of the
Class, as well as by a majority of the Plan Members.
Terminating the Plans
A majority of the Plan Members or a majority of the outstanding voting
securities of the Class may terminate the Plans at any time without penalty.
In addition, the Plans will terminate automatically upon their assignment.
Miscellaneous
So long as the Plans are in effect, the non-interested board members will
select and nominate the Plan Members of the Fund.
The Fund and UAMFDI intend to comply with the Conduct Rules of the National
Association of Securities Dealers relating to investment company sales
charges. with these rules.
Pursuant to the Plans, the board reviews, at least quarterly, a written report
of the amounts expended under each agreement with Service Agents and the
purposes for which the expenditures were made.
Additional Non-12b-1 Shareholder Servicing Arrangements
In addition to payments by the Fund under the Plans, UAM and any of its
affiliates, may, at its own expense, compensate a Service Agent or other
person for marketing, shareholder servicing, record-keeping and/or other
services performed with respect to the Fund, a portfolio or any class of
shares of a portfolio. The person making such payments may do so out of its
revenues, its profits or any other source available to it. Such services
arrangements, when in effect, are made generally available to all qualified
service providers. The adviser may also compensate its affiliated companies
for referring investors to a portfolio.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
38
<PAGE>
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if the
Board specifically approves such continuance every year. The Board or UAMFSI
may terminate the Fund Administration Agreement, without penalty, on not less
than ninety (90) days' written notice. The Fund Administration Agreement
automatically terminates upon its assignment by UAMFSI without the prior
written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
Administration and Transfer Agency Services Fees
Each portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, a portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at the
following rates:
Annual Rate
------------------------------------------------------------------------
DSI Disciplined Value Portfolio 0.063%
------------------------------------------------------------------------
DSI Limited Maturity Bond Portfolio 0.043%
------------------------------------------------------------------------
DSI Small Cap Value Portfolio 0.043%
------------------------------------------------------------------------
DSI Money Market Portfolio 0.023%
------------------------------------------------------------------------
DSI Balanced Portfolio 0.063%
2. Each portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is calculated
at the annual rate of:
. Not more than $35,000 for the first operational class; plus
39
<PAGE>
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM Funds
Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational class
and $2,500 for each additional class.
For the last three fiscal years the portfolios paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Value Portfolio
1999 $14,658 $53,712 $68,370
- ----------------------------------------------------------------------------------------------------------------------
1998 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Disciplined Value Portfolio
1999 $60,732 $86,524 $147,256
- ----------------------------------------------------------------------------------------------------------------------
1998 $164,593 $101,756 $266,349
- ----------------------------------------------------------------------------------------------------------------------
1997 $133,991 $87,680 $221,671
- ----------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
1999 $33,580 $52,054 $85,634
- ----------------------------------------------------------------------------------------------------------------------
1998 $53,814 $35,089 $88,903
- ----------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
1999 $31,888 $63,875 $95,763
- ----------------------------------------------------------------------------------------------------------------------
1998 $103,048 $86,420 $189,468
- ----------------------------------------------------------------------------------------------------------------------
1997 $94,275 $82,171 $176,446
- ----------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
1999 $38,984 $98,098 $137,082
- ----------------------------------------------------------------------------------------------------------------------
1998 $175,739 $140,251 $315,990
- ----------------------------------------------------------------------------------------------------------------------
1997 $224,190 $186,237 $410,427
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Fund.
- --------------------------------------------------------------------------------
BROKERAGE ALLOCATION AND OTHER PRACTICES
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
Each Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect to
all transactions for the portfolio. The adviser may select brokers based on
research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and not
instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when
40
<PAGE>
the adviser believes it is reasonable to do so in light of the value of the
research, statistical, and pricing services provided by the broker effecting
the transaction.
It is not the practice of the Fund to allocate brokerage or effect
principal transactions with dealers based on sales of shares that a
broker-dealer firm makes. However, the Fund may place trades with qualified
broker-dealers who recommend the Fund or who act as agents in the purchase
of Fund shares for their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for each portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the
same security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolios, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When a portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
Commissions Paid
For the last three fiscal years, the portfolios paid the following in
brokerage commissions:
<TABLE>
<S> <C>
Brokerage Commissions
- -----------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
1999 $136,808
- -----------------------------------------------------------------------------------------------------------------
1998 N/A
- -----------------------------------------------------------------------------------------------------------------
1997 N/A
- -----------------------------------------------------------------------------------------------------------------
Disciplined Value Portfolio
1999 $164,916
- -----------------------------------------------------------------------------------------------------------------
1998 $165,510
- -----------------------------------------------------------------------------------------------------------------
1997 $256,031
- -----------------------------------------------------------------------------------------------------------------
Balanced Portfolio
1999 $40,391
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
1998 $24,690
- -----------------------------------------------------------------------------------------------------------------
1997 N/A
- -----------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
1999 $0
- -----------------------------------------------------------------------------------------------------------------
1998 $1,929
- -----------------------------------------------------------------------------------------------------------------
1997 $0
- -----------------------------------------------------------------------------------------------------------------
Money Market Portfolio
1999 $0
- -----------------------------------------------------------------------------------------------------------------
1998 $0
- -----------------------------------------------------------------------------------------------------------------
1997 $0
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL STOCK AND OTHER SECURITIES
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its
name to "UAM Funds, Inc." The Fund's principal executive office is located
at 211 Congress Street, Boston, MA 02110; however, shareholders should
direct all correspondence to the address listed on the cover of this SAI.
The Fund is an open-end management company.
Description Of Shares And Voting Rights
- -------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing
board to issue three billion shares of common stock, with a $.001 par
value. The governing board has the power to create and designate one or
more series (portfolios) or classes of shares of common stock and to
classify or reclassify any unissued shares at any time and without
shareholder approval. When issued and paid for, the shares of each series
and class of the Fund are fully paid and nonassessable, and have no
pre-emptive rights or preference as to conversion, exchange, dividends,
retirement or other features.
The shares of each series and class have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of members of the governing board can elect all of the members if
they choose to do so. On each matter submitted to a vote of the
shareholders, a shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing
in his name on the books of the Fund. Shares of all classes will vote
together as a single class except when otherwise required by law or as
determined by the members of the Fund's governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. The liquidation of any
portfolio or class thereof may be authorized at any time by vote of a
majority of the members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are
identical in all respects. Unlike Institutional and Adviser Class Shares,
Institutional Service Class Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures. The Adviser Class Shares impose a sales load on
purchases. The classes also have different exchange privileges. The net
income attributable to Institutional Service Class Shares and the dividends
payable on Institutional Service Class Shares will be reduced by the amount
of the shareholder servicing and distribution
42
<PAGE>
fees; accordingly, the net asset value of the Institutional Service Class
Shares will be reduced by such amount to the extent a portfolio has
undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
FEDERAL TAXES
Each portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income
to shareholders each year so that the portfolio itself generally will be
relieved of federal income and excise taxes. If a portfolio were to fail to
so qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would
be taxed as if they received ordinary dividends, although corporate
shareholders could be eligible for the dividends received deduction.
A portfolios' dividends that are paid to their corporate shareholders and
are attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
NET ASSET VALUE PER SHARE
- -------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to
the NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result
by the total number of shares outstanding. For purposes of this
calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
43
<PAGE>
Each portfolio normally calculates its NAV as of the close of trading on
the NYSE every day the NYSE is open for trading. The NYSE usually closes at
4:00 p.m. The NYSE is closed on the following days: New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
44
<PAGE>
At its discretion, the Fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the Fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "How the Fund Values it Assets"
at the next determination of net asset value after acceptance. The Fund
will issue shares of the portfolio at the NAV of the portfolio determined
as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and
that there are no restrictions on their resale imposed by the 1933 Act
or otherwise;
. All dividends, interest, subscription, or other rights pertaining to
such securities become the property of the portfolio and are delivered
to the fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all
securities of the same issuer held by the portfolio cannot exceed 5%
of the net assets of the portfolio. This condition does not apply to
U.S. government securities.
Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such
exchanges should contact the adviser.
REDEMPTION OF SHARES
- -------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you
paid for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of
shares or dollar amount the shareholder wishes to redeem signed by all
registered owners of the shares in the exact names in which they are
registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts,
guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to
receive redemption proceeds. To change an account in this manner, you
must submit a written request signed by each shareholder, with each
signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable
for any losses if they fail to do so. These procedures include requiring
the investor to
45
<PAGE>
provide certain personal identification at the time an account is opened
and before effecting each transaction requested by telephone. In addition,
all telephone transaction requests will be recorded and investors may be
required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due
to unauthorized or fraudulent telephone instructions if the Fund or the
UAMSSC does not employ the procedures described above. Neither the Fund nor
the UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to
be genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment
of redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid
in whole or in part, in investment securities or in cash, as the Board may
deem advisable; however, payment will be made wholly in cash unless the
governing board believes that economic or market conditions exist which
would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be
valued as set forth under "Valuation of Shares." A redeeming shareholder
would normally incur brokerage expenses if these securities were converted
to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will
pay your redemption proceeds earlier as applicable law so requires.
46
<PAGE>
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of
the Commission as a result of which it is not reasonably practicable
for the portfolio to dispose of securities owned by it, or to fairly
determine the value of its assets; or
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. The performance is calculated separately
for each Class of a portfolio. Dividends paid by a portfolio with respect
to each Class will be calculated in the same manner at the same time on the
same day and will be in the same amount, except that service fees,
distribution charges and any incremental transfer agency costs relating to
Institutional Service Class Shares will be borne exclusively by that
class.
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in a portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a
stated period. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period.
47
<PAGE>
The fund calculates the average annual total return of a portfolio by
finding the average annual compounded rates of return over one, five and
ten-year periods that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each one, five and
ten-year period and the deduction of all applicable Fund expenses on an
annual basis. Since Institutional Service Class Shares bear additional
service and distribution expenses, their average annual total return will
generally be lower than that of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the
end of the 1, 5 or 10 year periods (or fractional portion
thereof).
Set forth in the table below are the portfolios' average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from a
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of 10 Years
One Year Years or Since Inception 7-day Yield 30-day Yield Inception
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Small Cap Value Portfolio
----------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares N/A N/A 5.60% N/A N/A 12/15/98
----------------------------------------------------------------------------------------------------------------------------
Disciplined Value Portfolio
----------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares -3.47% 13.92% 10.91% N/A N/A 12/12/89
----------------------------------------------------------------------------------------------------------------------------
Institutional Service Class Shares 3.86% N/A 3.62% N/A N/A 5/23/97
----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
----------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares -2.67% N/A 1.65% N/A 2.30% 12/22/97
----------------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
----------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 1.04% 5.56% 6.04% N/A 5.94% 12/18/89
----------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
----------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 4.77% 5.23% 4.91% 5.19% N/A 12/28/89
</TABLE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in a portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds.
As this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during
the base period. Since Institutional Service Class shares bear additional
service and distribution expenses, their yield will generally be lower than
that of the Institutional Class Shares.
48
<PAGE>
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
COMPARISONS
- --------------------------------------------------------------------------------
A portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data
reported in financial and industry publications, and various indices as
further described in this SAI. This information may also be included in
sales literature and advertising.
To help investors better evaluate how an investment in a portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various
financial publications. Advertisements may also compare performance (as
calculated above) to performance as reported by other investments, indices
and averages. Please see "Comparative Benchmarks" for publications, indices
and averages that may be used.
In assessing such comparisons of performance, an investor should keep in
mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in a
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by a portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that a portfolio will continue this
performance as compared to such other averages.
FINANCIAL STATEMENTS
The following documents are included in the portfolios' October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
49
<PAGE>
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
GLOSSARY
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser to each portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Distribution Plan refers to the Distribution Plan the Fund has adopted for
its Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Fund refers to UAM Funds, Inc. II.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Plan member refers to members of the board who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Plans.
Plans refers to the Distribution and Shareholder Servicing Plans the Fund
has adopted for its Service Class Shares pursuant to Rule 12b-1 under the
1940 Act.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
Service Plan refers to the Shareholder Servicing Plan the Fund has adopted
for its Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Service Class means the Institutional Service Class shares of a portfolio.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
50
<PAGE>
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a
top-quality preferred stock. This rating indicates good
asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will
remain relatively well-maintained in the foreseeable
future.
a An issue which is rated "a" is considered to be an
upper-medium grade preferred stock. While risks are judged
to be somewhat greater than in the "aaa" and "aa"
classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue that which is rated "baa" is considered to be a
medium--grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great
length of time.
ba An issue which is rated "ba" is considered to have
speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in
this class.
b An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport
to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high
degree and is likely to be in arrears on dividends with
little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can thus be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in
minus (-) each rating classification: the modifier 1 indicates
that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range
ranking and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
51
<PAGE>
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as
well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
Con. (...)
(This rating applies only to U.S. Tax-Exempt Municipals)
Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin
when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
52
<PAGE>
Prime-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics:
. Leading market positions in well-established
industries.
. Conservative capitalization structure with
moderate reliance on debt and ample asset
protection.
. Broad margins in earnings coverage of fixed
financial charges and high internal cash
generation.
. Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have
an acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the
level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior
obligations are typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy, as noted above. Accordingly,
in the case of junior debt, the rating may not conform exactly with the
category definition.
53
<PAGE>
AAA An obligation rated 'AAA' has the highest rating assigned
by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very
strong.
A An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment
than other speculative issues. However, it faces major
ongoing uncertainties or exposures to adverse business,
financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment
than obligations rated 'BB', but the obligor currently has
the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the
obligation.
CCC An obligation rated 'CCC' is currently vulnerable to
non-payment, and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its
financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated 'C'
is CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C'
rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but
payments on this obligation are being continued. A 'C' will
also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently
paying.
D An obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are
not made on the date due even if the applicable grace
period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period.
The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include:
obligation linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk
- such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest
terms, such as inverse floaters.
54
<PAGE>
N.R. This indicates that no rating has been requested, that
there is insufficient information on which to base a
rating, or that Standard & Poor's does not rate a
particular obligation as a matter of policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to
meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The
'D' rating category is used when payments on an obligation
are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors' believes
that such payments will be made during such grace period.
The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment
is a key factor in this analysis. An obligor's capacity to repay foreign
currency obligations may be lower than its capacity to repay obligations in
its local currency due to the sovereign government's own relatively lower
capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific
issues. Foreign currency issuer ratings are also distinguished from local
currency issuer ratings to identity those instances where sovereign risks
make them different for the same issuer.
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DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of
economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic
stress.
BBB+/BBB Below-average protection factors but still considered
BBB- sufficient for prudent investment. Considerable
variability in risk during economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet
BB- obligations when due. Present or prospective financial
protection factors fluctuate according to industry
conditions. Overall quality may move up or down frequently
within this category.
B+/B/B- Below investment grade and possessing risk that obligation
will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection
factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
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Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a
high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case
of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote a low expectation
of credit risk. The capacity for timely payment of
financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a
possibility of credit risk developing, particularly as the
result of adverse economic change over time; however,
business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A
`CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
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<PAGE>
DDD,DD,D Default. The ratings of obligations in this category are
based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and
cannot be estimated with any precision, the following serve
as general guidelines. "DDD" obligations have the highest
potential for recovery, around 90%-100% of outstanding
amounts and accrued interest. "D" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or
all of their obligations. Entities rated "DDD" have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated
"DD" are likely to satisfy a higher portion of their
outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for
timely payment of financial commitments; may have an added
"+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term
adverse changes could result in a reduction to non-
investment grade.
B Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment .
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' long-term
rating category, to categories below `CCC', or to short-term ratings other
than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically
resolved over a relatively short period.
COMPARATIVE BENCHMARKS
(alphabetically)
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CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time in
the price of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market
fund yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on
the New York Stock Exchange. It has been a widely followed indicator of the
stock market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New
York Times, Personal Investor, The Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund performance
over specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market
capitalization-weighted index maintained by the International Finance
Corporation. This index consists of over 890 companies in 26 emerging
equity markets, and is designed to measure more precisely the returns
portfolio managers might receive from investment in emerging markets equity
securities by focusing on companies and markets that are legally and
practically accessible to foreign investors.
Lehman Brothers Indices:
-----------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market
value-weighted index that combines the Lehman Government/Corporate Index
and the Lehman Mortgage-Backed Securities Index, and includes treasury
issues, agency issues, corporate bond issues and mortgage backed
securities. It includes fixed rate issuers of investment grade (BBB) or
higher, with maturities of at least one year and outstanding par values of
at least $100 million for U.S. government issues and $25 million for
others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate
debt. Also included are yankee bonds, which are dollar-denominated SEC
registered public, nonconvertible debt issued or guaranteed by foreign
sovereign governments, municipalities, or governmental agencies, or
international agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower
bonds and foreign-targeted issues, and the Agency Bond Index (all publicly
issued debt of U.S. government agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. government). In addition to the
aggregate index, sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed
income market value-weighted index that combines the Government and
Corporate Bond Indices, including U.S. government treasury securities,
corporate and yankee bonds. All issues are investment grade (BBB) or
higher, with maturities of at least one year and outstanding par value of
at least $100 million of U.S. government issues and $25 million for others.
Any security downgraded during
59
<PAGE>
the month is held in the index until month end and then removed. All
returns are market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate,
non-investment grade debt. All bonds included in the index are dollar
denominated, nonconvertible, have at least one year remaining to maturity
and an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged
fixed income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of
all fixed-rate securities backed by mortgage pools of Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30
largest mutual funds within their respective portfolio investment
objectives. The indices are currently grouped in six categories: U.S.
Diversified Equity with 12 indices; Equity with 27 indices, Taxable Fixed-
Income with 20 indices, Tax-Exempt Fixed-Income with 28 indices, Closed-End
Funds with 16 indices, and Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment
objectives were changed while other equity objectives remain unchanged.
Changing investment objectives include Capital Appreciation Funds, Growth
Funds, Mid-Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income
Funds, and Equity Income Funds. Unchanged investment objectives include
Sector Equity Funds, World Equity Funds, Mixed Equity Funds, and certain
other funds including all Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in
group; 2) number of component funds remains the same (30); 3) component
funds are defined annually; 4) can be linked historically; and 5) are used
as a benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers,
liquidations, etc.; and 4) will be inaccurate if historical averages are
linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include,
but are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an
average of 100 funds that invest at least 65% of assets in investment grade
debt issues (BBB or higher) with dollar-weighted average maturities of one
to five years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds
whose primary objective is to conserve principal by maintaining at all
times a balanced portfolio of both stocks and bonds. Typically, the
stock/bond ratio ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing
60% or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
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<PAGE>
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest
funds by asset size which invest in companies with long-term earnings
expected to grow significantly faster than the earnings of the stocks
represented in the major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions,
exclusive of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an
unmanaged index composed of U.S. treasuries, agencies and corporates with
maturities from 1 to 4.99 years. Corporates are investment grade only (BBB
or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market
value-weighted averages of the performance of over 900 securities listed on
the stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign
common stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading
stocks listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
---------------------------
Russell 3000(R)Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance
of the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance
of the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000
Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of
the total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of
the total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance
of the 2,5000 smallest companies in the Russell 3000 Index, which
represents approximately 17% of the total market capitalization of the
Russell 3000 Index.
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Russell 3000(R) Growth Index - measures the performance of those Russell
3000 Index companies with higher price-to-book ratios and higher forecasted
growth values. The stocks in this index are also members of either the
Russell 1000 Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell
3000 Index companies with lower price-to-book ratios and lower forecasted
growth values. The stocks in this index are also members of either the
Russell 1000 Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell
1000 companies with higher price-to-book ratios and higher forecasted
growth values.
Russell 1000(R) Value Index - measures the performance of those Russell
1000 with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted
growth values.
Russell 2000(R) Value Index - measures the performance of those Russell
2000 companies with lower price-to-book ratios and lower forecasted growth
values.
Russell Top 200(TM) Growth Index - measures the performance of those
Russell Top 200 companies with higher price-to-book ratios and higher
forecasted growth values. The stocks re also members of the Russell 1000
Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted
growth values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted
growth values. The stocks are also members of the Russell 1000 Growth
index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted
growth values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell
2500 companies with higher price-to-book ratios and higher forecasted
growth values.
Russell 2500(TM) Value Index - measures the performance of those Russell
2500 companies with lower price-to-book ratios and lower forecasted growth
values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of
$1 million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and
does not reflect any transaction costs. Direct investment in the index is
not possible.
Standard & Poor's U.S. Indices:
------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital
International launched a new global industry classification standard
consisting of 10 economic sectors aggregated from 23 industry groups, 59
industries, and 123 sub-industries covering almost 6,000 companies
globally. The new classification standard will be used with all of their
respective indices. Features of the new classification include 10 economic
sectors, rather than the 11 S&P currently uses. Sector and industry
gradations are less severe. Rather than jumping from 11 sectors to 115
industries under the former S&P system, the new system progresses from 10
sectors through 23 industry groups, 50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its
market value.
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It is used by over 95% of U.S. managers and pension plan sponsors. More
than $25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic
stocks chosen for market size, liquidity, and industry group
representation. The index is comprised of stocks from the industrial,
utility, financial, and transportation sectors. It is gaining wide
acceptance as the preferred benchmark for both active and passive
management due to its low turnover and greater liquidity. Approximately $8
billion is indexed to the S&P SmallCap 600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap
600 indices, representing 87% of the total U.S. equity market
capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the
market performance of U.S. Real Estate Investment Trusts, known as REITS.
The REIT Composite consists of 100 REITs chosen for their liquidity and
importance in representing a diversified real estate portfolio. The Index
covers over 80% of the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including
23 electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
--------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
--------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as
Denmark, Norway, Sweden and Switzerland. The S&P Euro Plus Index contains
200 constituents, and the S&P Euro Index, a subset of Euro Plus, contains
160 constituents. Both indices provide geographic and economic diversity
over 11 industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed
as the new Canadian large cap benchmark and will ultimately replace the
Toronto 35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure
liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each
major economic sector of major Asia-Pacific equity markets. Seven countries
-- Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and
Taiwan -- are represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes
highly liquid securities from major economic sectors of Mexican and South
American equity markets. Companies from Mexico, Brazil, Argentina, and
Chile are represented in the new index.
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S&P United Kingdom 150 Index - includes 150 highly liquid securities
selected from each of the new S&P sectors. The S&P UK 150 is designed to be
broad enough to provide representation of the market, but narrow enough to
ensure liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged
index comprised of the smallest stocks (less than $1 billion market
capitalization) of the Extended Market Index, of both developed and
emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill
issues.
Savings and Loan Historical Interest Rates -- as published by the U.S.
Savings and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and
inflation.
Target Large Company Value Index - an index comprised of large companies
with market capitalizations currently extending down to approximately $1.9
billion that are monitored using a variety of relative value criteria in
order to capture the most attractive value opportunities available. A high
quality profile is required and companies undergoing adverse financial
pressures are eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all
treasury bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value
Line Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted
index of publicly traded real estate securities, including real estate
investment trusts, real estate operating companies and partnerships. The
index is used by the institutional investment community as a broad measure
of the performance of public real estate equity for asset allocation and
performance comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs)
but excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment
of dividends, except as otherwise stated.
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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
FMA Small Company Portfolio
Institutional Class Shares
Institutional Service Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the portfolio dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolio by contacting the UAM Funds at the address listed
above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Description of Permitted Investments....................................................................... 1
What Investment Strategies May the Portfolio Use?......................................................... 1
Debt Securities........................................................................................... 1
Derivatives............................................................................................... 8
Equity Securities......................................................................................... 16
Foreign Securities........................................................................................ 18
Investment Companies...................................................................................... 21
Repurchase Agreements..................................................................................... 22
Restricted Securities..................................................................................... 22
Securities Lending........................................................................................ 22
When Issued Transactions.................................................................................. 23
Investment Policies of the Portfolio....................................................................... 23
Fundamental Policies...................................................................................... 24
Non-Fundamental Policies.................................................................................. 24
Management Of The Fund..................................................................................... 25
Principal Shareholders..................................................................................... 26
Investment Advisory and Other Services..................................................................... 27
Investment Adviser........................................................................................ 27
Distributor............................................................................................... 29
Service And Distribution Plans............................................................................ 30
Administrative Services................................................................................... 32
Custodian................................................................................................. 34
Independent Accountants................................................................................... 34
Brokerage Allocation and Other Practices................................................................... 34
Selection of Brokers...................................................................................... 34
Simultaneous Transactions................................................................................. 34
Brokerage Commissions..................................................................................... 34
Capital Stock and Other Securities......................................................................... 35
Description Of Shares And Voting Rights................................................................... 35
Purchase, Redemption and Pricing of Shares................................................................. 36
Net Asset Value Per Share................................................................................. 37
Purchase of Shares........................................................................................ 37
Redemption of Shares...................................................................................... 38
Exchange Privilege........................................................................................ 40
Transfer Of Shares........................................................................................ 40
Performance Calculations................................................................................... 40
Total Return.............................................................................................. 41
Yield..................................................................................................... 41
Comparisons............................................................................................... 42
Financial Statements....................................................................................... 42
Glossary................................................................................................... 43
Bond Ratings............................................................................................... 44
Moody's Investors Service, Inc............................................................................ 44
Standard & Poor's Ratings Services........................................................................ 46
Duff & Phelps Credit Rating Co............................................................................ 49
Fitch IBCA Ratings........................................................................................ 50
Comparative Benchmarks..................................................................................... 51
</TABLE>
<PAGE>
Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio currently intends to use the securities and investment
strategies listed below in seeking its objectives; however, it may at any time
invest in any of the investment strategies described in this SAI. This SAI
describes each of these investments/strategies and their risks. The portfolio
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. The investments that are
italicized are principal strategies and you can find more information on these
techniques in the prospectus of the portfolio. You can find more information
concerning the limits on the ability of the portfolio to use these investments
in "What Are the Investment Strategies of the Portfolio?"
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
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Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities, such
as zero-coupon bonds, do not pay current interest and are purchased at a
discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities include
treasury notes, which have initial maturities of one to ten years and treasury
bonds, which have initial maturities of at least ten years and certain types
of mortgage-backed securities that are described under "Mortgage-Backed
Securities" and "Other Asset-Backed Securities." This SAI discusses mortgage-
backed treasury and agency securities in detail in the section called
"Mortgage-Backed Securities" and "Other Asset-Backed Securities."
The full faith and credit of the U.S. government supports treasury securities.
Unlike treasury securities, the full faith and credit of the U.S. government
generally do not back agency securities. Agency securities are typically
supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
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. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the
credit risk is minimal. The U.S. government does not guarantee the net asset
value of the assets of the portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors,
the corporation promises to pay investors interest, and repay the principal
amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part or
all of the loan balance before maturity, the effective maturity of a mortgage-
backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The adviser will consider
such insurance and guarantees and the creditworthiness of the issuers thereof
in determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or guarantors will
not meet their obligations under the insurance policies or guarantee
arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of portfolio
shares. To buy GNMA securities, the portfolio may have to pay a premium over
the maturity value of the underlying mortgages, which the portfolio may lose
if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks,
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commercial banks and credit unions and mortgage bankers. Securities issued by
FNMA are agency securities, which means FNMA, but not the U.S. government,
guarantees their timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these issuers
generally offer a higher rate of interest than pools created by GNMA, FNMA &
FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off their
mortgage earlier than expected forcing the portfolio to reinvest the money at
a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, the portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which allow debtors
to reduce their balances by offsetting certain amounts owed on the credit
cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such
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receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Due to the quantity of vehicles involved and
requirements under state laws, asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
The portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of asset-backed
securities depends in part on the characteristics of the underlying assets,
the coupon rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying
assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, the portfolio may invest a portion of its assets
in the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a
short-term debt security has a maturity of one year or less.
Bank Obligations
The portfolio will only invest in a security issued by a commercial bank if
the bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. is a foreign branch of a U.S. bank and the adviser believes the security
is of an investment quality comparable with other debt securities that the
portfolio may purchase.
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Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
The portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. The portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See "Bond Ratings" for a description
of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. Typically, one class will receive
some of the interest and most of the principal, while the other class will
receive most of the interest and the remaining principal. In extreme cases,
one class will receive all of the interest ("interest only" or "IO" class)
while the other class will receive the entire principal sensitive to the rate
of principal payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments may
adversely affect the yield to maturity of IOs. Slower than anticipated
prepayments of principal may adversely affect the yield to maturity of a PO.
The yields and market risk of interest only and principal only stripped
mortgage-backed securities, respectively, may be more volatile than those of
other fixed income securities, including traditional mortgage-backed
securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See
"FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold
at a discount from their face value. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. The amount of the
discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security
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will have a longer duration than an ordinary debt security with the same
maturity. The portfolio's investments in pay-in-kind, delayed and zero coupon
bonds may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once
the holder of the security has stripped or separated corpus and coupons, it
may sell each component separately. The principal or corpus is then sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold bundled in such
form. The underlying treasury security is held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder thereof), in
trust on behalf of the owners thereof. Purchasers of stripped obligations
acquire, in effect, discount obligations that are economically identical to
the zero coupon securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," the portfolio can record its beneficial ownership of the coupon
or corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
The portfolio that invests in debt securities has no real maturity. Instead,
it calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by the portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or the portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years --
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
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Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation for
assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and complete
repayment of principal is less certain. The credit rating or financial
condition of an issuer may affect the value of a debt security. Generally,
the lower the quality rating of a security, the greater the risks that the
issuer will fail to pay interest and return principal. To compensate investors
for taking on increased risk, issuers with lower credit ratings usually offer
their investors a higher "risk premium" in the form of higher interest rates
above comparable Treasuries securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an adjustment
to this "risk premium." Since an issuer's outstanding debt carries a fixed
coupon, adjustments to the risk premium must occur in the price, which effects
the yield to maturity of the bond. If an issuer defaults or becomes unable to
honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
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Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause the portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolio currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's opinion,
not an absolute standard of quality, and they do not reflect an evaluation of
market risk. The section "Bond Ratings" contains further information
concerning the ratings of certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time the portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. The portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner, to
reduce transaction costs or to remain fully invested. They may also invest in
derivatives to protect it from broad fluctuations in market prices, interest
rates or foreign currency exchange rates. Investing in derivatives for these
purposes is known as "hedging." When hedging is successful, the portfolio will
have offset any depreciation in the value of its portfolio securities by the
appreciation in the value of the derivative position. Although techniques
other than the sale and purchase of derivatives could be used to control the
exposure of the portfolio to market fluctuations, the use of derivatives may
be a more effective means of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party sells
and the other party agrees to buy a specified amount of a financial instrument
at an agreed upon price and time. The financial instrument underlying the
contract may be a stock, stock index, bond, bond index, interest rate, foreign
exchange rate or other similar instrument. Agreeing to buy the underlying
financial information is called buying a futures contract or taking a long
position in the contract. Likewise, agreeing to sell the underlying financial
instrument is called selling a futures contract or taking a short position in
the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit
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"initial margin" with a futures broker, known as a futures commission
merchant, when they enter into the contract. Initial margin deposits are
typically equal to a percentage of the contract's value. After they open a
futures contract, the parties to the transaction must compare the purchase
price of the contract to its daily market value. If the value of the futures
contract changes in such a way that a party's position declines, that party
must make additional "variation margin" payments so that the margin payment is
adequate. On the other hand, the value of the contract may change in such a
way that there is excess margin on deposit, possibly entitling the party that
has a gain to receive all or a portion of this amount. This process is known
as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the sale price upon closing out the contract is less than the
original purchase price, the person closing out the contract will realize a
loss. If the sale price upon closing out the contract is more that the
original purchase price, the person closing out the contract will realize a
gain. The opposite is also true. If the purchase price upon closing out the
contract is more than the original sale price, the person closing out the
contract will realize a loss. If the purchase price upon closing out the
contract is less than the original sale price, the person closing out the
contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the exercise price
plus the premium paid and related transaction costs. Otherwise, the portfolio
would realize either no gain or a loss on the purchase of the call option.
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The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower price.
If security prices fall, the portfolio may lose an amount of money equal to
the difference between the value of the security and the premium it received.
Writing covered put options may deprive the portfolio of the opportunity to
profit from a decrease in the market price of the securities it would like to
acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price;
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. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option).
If the option is exercised, the parties will be subject to the futures
contracts. In addition, the writer of an option on a futures contract is
subject to initial and variation margin requirements on the option position.
Options on futures contracts are traded on the same contract market as the
underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead
of selling or buying futures contracts. The portfolio may buy a put option on
a futures contract for the same reasons it would sell a futures contract. It
also may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures
contracts, such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the portfolio would retain the option premium, which would offset, in part,
any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if the market price declines, the
portfolio would pay more than the market price for the underlying instrument.
The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of a
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substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed
to futures contracts which are traded only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely,
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the portfolio may have to sell on the spot market some of the foreign currency
it received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing rates,
security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the portfolio,
the portfolio must be prepared to make such payments when due. In addition, if
the counter-party's creditworthiness declined, the value of a swap agreement
would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the
prior written consent of the other party. The portfolio may be able to
eliminate its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counter-party is unable to
meet its obligations under the contract, declares bankruptcy, defaults or
becomes insolvent, the portfolio may not be able to recover the money it
expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the SEC. If the portfolio enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the portfolio's accrued obligations under the
swap agreement over the accrued amount the portfolio is entitled to receive
under the agreement. If the portfolio enters into a swap agreement on other
than a net basis, it will segregate assets with a value equal to the full
amount of the portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of interest
rate cash flow on specified dates in the future. Some of the different types
of interest rate swaps are "fixed-for floating rate swaps," "termed basis
swaps" and "index amortizing swaps." Fixed-for floating rate swap involve the
exchange of fixed interest rate cash flows for floating rate cash flows.
Termed basis swaps entail cash flows to both parties based on floating
interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the portfolio enters into a swap where it agrees to exchange a
floating rate of interest for a fixed rate of interest, the portfolio may have
to pay more money than it receives. Similarly, if the portfolio enters into a
swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the portfolio may receive less money than it has agreed to pay.
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Currency Swaps -- A currency swap is an agreement between two parties in which
one party agrees to make interest rate payments in one currency and the other
promises to make interest rate payments in another currency. A portfolio may
enter into a currency swap when it has one currency and desires a different
currency. Typically the interest rates that determine the currency swap
payments are fixed, although occasionally one or both parties may pay a
floating rate of interest. Unlike an interest rate swap, however, the
principal amounts are exchanged at the beginning of the contract and returned
at the end of the contract. Changes in foreign exchange rates and changes in
interest rates, as described above may negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the portfolio than if it had not entered into
any derivatives transactions. Derivatives may magnify the portfolio's gains
or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities the portfolio is hedging may not move
in the same amount, or even in the same direction as the hedging instrument.
The adviser will try to minimize this risk by investing only in those
contracts whose behavior it expects to resemble the portfolio securities it is
trying to hedge. However, if the portfolio's prediction of interest and
currency rates, market value, volatility or other economic factors is
incorrect, the portfolio may lose money, or may not make as much money as it
expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
. current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
. differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
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Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on
a broad market index. Since narrower indices are made up of a smaller number
of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration in
the issuer's creditworthiness. Because the value of the portfolio's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the portfolio's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange
the contract was initially traded. Although a portfolio intends to purchase
options and futures only where there appears to be an active market, there is
no guarantee that such a liquid market will exist. If there is no secondary
market for the contract, or the market is illiquid, the portfolio may not be
able to close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage firm
or clearing house or other occurrences may disrupt normal trading activity;
or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on
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the adviser's expectation that the price of the underlying security would
rise, but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current market
price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum
amount that the price of a derivative may vary from the settlement price of
that derivative at the end of trading on the previous day. Once the price of
a derivative reaches this value, a portfolio may not trade that derivative at
a price beyond that limit. The daily limit governs only price movements
during a given day and does not limit potential gains or losses. Derivative
prices have occasionally moved to the daily limit for several consecutive
trading days, preventing prompt liquidation of the derivative.
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
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Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give
the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price that
is usually higher than the market price at the time the warrant is issued.
Corporations often issue warrants to make the accompanying debt security more
attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
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Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of
their small or medium size, limited markets and financial resources, narrow
product lines and frequent lack of management depth. The securities of small
and medium companies are often traded in the over-the-counter market and might
not be traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities. EDRs are similar to ADRs, except that they are
typically issued by European Banks or trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
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Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. Investments in these investment funds are subject to the
provisions of the 1940 Act. Shareholders of a UAM Fund that invests in such
investment funds will bear not only their proportionate share of the expenses
of the UAM Fund (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in foreign
securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit the portfolio's ability to invest in a particular country or
make it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
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Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the
United States dollar will result in a corresponding change in value of
securities denominated in that currency. Some of the factors that may impair
the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover
a portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
20
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that adopt the Euro
in all aspects of the investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custody and accounting. Some of the
uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
The portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by the portfolio. Like other shareholders, the portfolio
would pay its proportionate share of those fees. Consequently, shareholders
of the portfolio would pay not only the management fees of the portfolio, but
also the management fees of the investment company in which the
21
<PAGE>
portfolio invests. The portfolio may invest up to 10% of its total assets in
the securities of other investment companies, but may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the outstanding securities of any one investment company.
The SEC has granted an order that allows the portfolio to invest the greater
of 5% of its total assets or $2.5 million in the UAM DSI Money Market
Portfolio, provided that the investment is:
. For cash management purposes;
. Consistent with the portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The portfolio will bear expenses of the UAM DSI Money Market Portfolio on the
same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolio normally uses repurchase agreements to earn
income on assets that are not invested.
When the portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before the portfolio can sell it and the portfolio might incur
expenses in enforcing its rights.
RESTRICTED SECURITIES
- --------------------------------------------------------------------------------
The portfolio may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the
portfolio or less than what may be considered the fair value of such
securities.
SECURITIES LENDING
- --------------------------------------------------------------------------------
The portfolio may lend a portion of its total assets to broker- dealers or
other financial institutions. It may then reinvest the collateral it receives
in short-term securities and money market funds. When the portfolio lends its
securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U. S.
government;
22
<PAGE>
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction,
the portfolio contracts to purchase securities for a fixed price at a future
date beyond customary settlement time. "Delayed delivery" refers to
securities transactions on the secondary market where settlement occurs in the
future. In each of these transactions, the parties fix the payment obligation
and the interest rate that they will receive on the securities at the time the
parties enter the commitment; however, they do not pay money or deliver
securities until a later date. Typically, no income accrues on securities the
portfolio has committed to purchase before the securities are delivered,
although the portfolio may earn income on securities it has in a segregated
account. The portfolio will only enter into these types of transactions with
the intention of actually acquiring the securities, but may sell them before
the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolio
The portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, the
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
23
<PAGE>
FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following investment limitations are fundamental, which means the
portfolio cannot change them without approval by the vote of a majority of the
outstanding voting securities of the portfolio, as defined by the 1940 Act.
The portfolio will not:
. with respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (except
obligations of the U.S. government and its instrumentalities).
. with respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 10% of the
portfolio's gross assets valued at the lower of market or cost.
. invest for the purpose of exercising control over management of any
company.
. invest in commodities.
. invest more than 25% of its total assets in companies within a single
industry; however, there are no limitations on investments issued or
guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
. invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the portfolio from (1) making
any permitted borrowings, mortgages or pledges, or (2) entering repurchase
transactions.
. make loans except by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
or by lending its portfolio securities to banks, brokers, dealers and
other financial institutions so long as the loans are not inconsistent with
the 1940 Act or the rules and regulations or interpretations of the SEC.
. pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value.
. purchase additional securities when borrowings exceed 5% of total assets.
. purchase on margin or sell short.
. purchase or retain securities of an issuer if those officers and board
members or its investment adviser owning more than 1/2 1/2 of 1% of such
securities together own more than 5% of such securities.
. purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate and may purchase and sell securities
which are secured by interests in real estate.
. underwrite the securities of other issuers or invest more than an aggregate
of 10% of the assets of the portfolio, determined at the time of
investment, in securities subject to legal or contractual restrictions on
resale or securities for which there are no readily available markets,
including repurchase agreements having maturities of more than seven days.
. write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the portfolio may
change them without shareholder approval. The portfolio will not:
. invest in stock or bond futures and/or options on futures unless (1) not
more than 5% of the portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts
provided; however,
24
<PAGE>
that in the case of an option that is in-the-money may be excluded in
computing such 5% and (2) not more than 20% of the portfolio's assets are
invested in stock or bond futures and options on futures.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to execute
policies the board has formulated. The Fund pays each board member who is not
also an officer or affiliated person (independent board member) a $150
quarterly retainer fee per active portfolio and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and
other expenses incurred while attending board meetings. The $2,000 meeting
fee and expense reimbursements are aggregated for all of the board members and
allocated proportionately among the portfolios of the UAM Funds Complex. The
Fund does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from the
UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act. Mr.
English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in the
UAM Funds Complex. However, the Fund does not believe that the relationship
is a material business relationship, and, therefore, does not consider him to
be an "interested person" of the Fund. If these circumstances change, the
Board will determine whether any action is required to change the composition
of the Board.
<TABLE>
<CAPTION>
Aggregate Aggregate
Compensation Compensation
From the Fund From the Fund
Position Principal Occupations During the as of Complex as of
Name, Address, DOB with Fund Past 5 years October 31, 1999 October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John T. Bennett, Jr. Board Member President of Squam Investment Management Company, $7,137 $10,625
College Road -- RFD 3 Inc. and Great Island Investment Company, Inc.;
Meredith, NH 03253 President of Bennett Management Company from 1988 to
1/26/29 1993.
- ------------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Member Financial Officer of World Wildlife Fund since $7,137 $10,625
1250 24/th/ St., NW January 1999; Vice President for Finance and
Washington, DC 20037 Administration and Treasurer of Radcliffe College
8/14/51 from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Member Executive Vice President and Chief Administrative $7,137 $10,625
100 King Street West Officer of Philip Services Corp.; Formerly, a Partner
P.O. Box 2440, LCD-1 in the Philadelphia office of the law firm Dechert
Hamilton Ontario, Price & Rhoads and a Director of Hofler Corp.
Canada L8N-4J6
4/21/42
- ------------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board Member President and Chief Executive Officer of Broventure $7,137 $10,625
16 West Madison Street Company, Inc.; Chairman of the Board of Chektec
Baltimore, MD 21201 Corporation and Cyber Scientific, Inc.
8/5/48
- ------------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board Member President of UAM Investment Services, Inc. since 0 0
211 Congress Street March 1999; Vice President UAM Trust Company since
Boston, MA 02110 January 1996; Principal of UAM Fund Distributors,
2/24/53 Inc. since December 1995; Vice President of UAM
Investment Services, Inc. from January 1996 to March
1999 and a Director and Chief Operating Officer of CS
First Boston Investment Management from 1993-1995.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate
Compensation Compensation
From the Fund From the Fund
Name, Address, Position Principal Occupations During the as of Complex as of
DOB with Fund Past 5 years October 31, 1999 October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director of 0 0
One International Place Member; United Asset Management Corporation; Director,
Boston, MA 02110 President Partner or Trustee of each of the Investment
3/21/35 and Chairman Companies of the Eaton Vance Group of Mutual Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board Member President and Chief Investment Officer of Dewey 0 0
One Financial Center Square Investors Corporation since 1988; Director and
Boston, MA 02111 Chief Executive Officer of H.T. Investors, Inc.,
7/1/43 formerly a subsidiary of Dewey Square.
- ------------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial Officer 0 0
One International Place President of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- ------------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of the 0 0
211 Congress Street Fidelity Group of Mutual Funds from 1991 to 1995;
Boston, MA 02110 held various other offices with Fidelity Investments
7/4/51 from November 1990 to March 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase Global Fund
Boston, MA 02110 Services Company from 1995 to 1996; Senior Manager of
9/18/63 Deloitte & Touche LLP from 1985 to 1995,
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI Investments; 0 0
SEI Investments Treasurer Senior Manager at Arthur Andersen prior to 1994.
One Freedom Valley Rd.
Oaks, PA 19456
12/17/63
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Class
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. 23.70% Institutional Class Shares
Reinvest Account
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Invest Inst Operations Co Inc. 20.93% Institutional Class Shares
For Certain Employee Benefit Plans
100 Magellan Way KWIC
Covington, KY 41015-1999
- ------------------------------------------------------------------------------------------------------------------------------------
Dingle & Co. 5.04% Institutional Class Shares
C/O Coamerica Bank
Attn: Mutual Funds
P.O. Box 75000
Detroit, MI 48275-0001
- ------------------------------------------------------------------------------------------------------------------------------------
American Express Trust Company TR 99.98% Institutional Service Class Shares
FBO American Express Trust Retirement Services Plan
PO Box 534
Minneapolis, MN 55440-0534
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolio.
26
<PAGE>
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Fiduciary Management Associates Inc., an Illinois corporation located at 55
Monroe Street, Suite 2550, Chicago, Illinois 60603, is the investment adviser
to the portfolio. The adviser manages and supervises the investment of the
portfolio's assets on a discretionary basis. The adviser, an affiliate of
United Asset Management Corporation, has provided investment management
services to corporations, foundations, endowments, pension and profit sharing
plans, trusts, estates and other institutions as well as individuals since
1980.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds Complex.
Portfolio Management
A team of investment professionals is primarily responsible for the day-to-day
management of the portfolio. Listed below are the investment professionals of
the adviser that comprise the team and a description of their business
experience during the past five years.
<TABLE>
<CAPTION>
Name & Title Experience
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Kathryn A. Vorisek Ms. Vorisek joined the adviser in 1996 with a broad background in the investment field.
Executive Vice President & Previous responsibilities include serving as Vice President in the fixed income and equity
Portfolio Manager departments at Duff & Phelps Corporation from 1989 to 1996. Prior to that, she served as
an institutional equity salesperson at Lehman Brothers. After receiving her B.S. degree
in Finance from Marquette University, Ms. Vorisek earned her Masters in Management degree
from Northwestern University in Finance and International Business. She is a member of
the Association for Investment Management and Research as well as the Investment Analysts
Society of Chicago.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name & Title Experience
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Terry B. French Mr. French joined the adviser in 1997 with over 25 years of professional investment
Senior Vice President & experience. Previous responsibilities include Senior Securities Analyst and Team Head for
Portfolio Manager the Technology Group at Stein, Roe & Farnham from 1988 to 1991. Prior to that, he served
as Senior Securities Analyst and Sector Head in the Trust Department of Harris Trust and
Savings Bank analyzing technology, industrial, aerospace and capital goods companies. He
began his professional investment career as a Technology Analyst with IDS Financial. He
started his professional career as an aerodynamicist specializing in the formation and
development of applied computer simulation design techniques for Boeing Company. Mr.
French holds BS and MS degrees in Aeronautical Engineering from the University of
Washington and a M.B.A. in Finance and Accounting from Seattle University. He is a member
of the Association for Investment Management and Research as well as the Investment
Analysts Society of Chicago.
David Faircloth, CFA Mr. Faircloth joined the adviser in 1998 with over 10 years of investment experience.
Vice President & Portfolio Prior to joining the adviser, Mr. Faircloth was a Portfolio Manager and Vice President at
Manager The Northern Trust Company from 1990 until October 1998, where he co-managed a convertible
securities mutual fund and managed individual accounts. He has a B.S. from DePaul
University and a Masters of Management from Northwestern University in Finance, Marketing
and International Business. Mr. Faircloth is a Chartered Financial Analyst and a member
of the Association for Investment Management and Research as well as the Investment
Analysts Society of Chicago.
</TABLE>
Investment Advisory Agreement
This section summarizes some of the important provisions of the Investment
Advisory Agreement. The Fund has filed the Investment Advisory Agreement with
the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
The adviser:
. Manages the investment and reinvestment of the portfolio's assets;
. Continuously reviews, supervises and administers the investment program of
the portfolio; and
. Determines what portion of the portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Investment Advisory Agreement, (2) reckless disregard by the adviser of
its obligations and duties under the Investment Advisory Agreement, or (3) a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
28
<PAGE>
Continuing an Investment Advisory Agreement
The Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the portfolio pays its adviser a fee equal to of the
average daily net assets of the portfolio. Due to the effect of fee waivers by
the adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For the last three fiscal years, the portfolio
paid the following in management fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Investment Advisory Fees Total Investment Advisory
Paid Waived Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FMA Small Company Portfolio $1,340,556 $310,560 $1,029,996
1999
- ------------------------------------------------------------------------------------------------------------------------------------
1998 $ 965,234 $110,445 $ 854,789
- ------------------------------------------------------------------------------------------------------------------------------------
1997 $ 142,036 $ 89,172 $ 52,864
</TABLE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services, and any amounts it may receive under a Service
and Distribution Plan are passed through in their entirety to third parties.
UAMFDI, an affiliate of UAM, is located at 211 Congress Street, Boston,
Massachusetts 02110.
29
<PAGE>
SERVICE AND DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan (the
"Plans") for the portfolio's Institutional Service Class Shares pursuant to
Rule 12b-1 under the 1940 Act.
Shareholder Servicing Plan
The Shareholder Servicing Plan (Service Plan) permits the Fund to compensate
broker-dealers or other financial institutions (Service Agents) that have
agreed with UAMFDI to provide administrative support services to Institutional
Service Class shareholders that are their customers. Under the Service Plan,
Institutional Service Class Shares may pay service fees at the maximum annual
rate of 0.25 of the average daily net asset value of such shares held by the
Service Agent for the benefit of its customers. The Fund pays these fees out
of the assets allocable to the portfolio's Institutional Service Class Shares
to UAMFDI, to the Service Agent directly or through UAMFDI. Each item for
which a payment may be made under the Service Plan constitutes personal
service and/or shareholder account maintenance and may constitute an expense
of distributing Institutional Service Class Shares as the SEC construes such
term under Rule 12b-1. Services for which Institutional Service Class Shares
may compensate Service Agents include:
. Acting as the sole shareholder of record and nominee for beneficial owners.
. Maintaining account records for such beneficial owners of the Fund's
shares.
. Opening and closing accounts.
. Answering questions and handling correspondence from shareholders about
their accounts.
. Processing shareholder orders to purchase, redeem and exchange shares.
. Handling the transmission of funds representing the purchase price or
redemption proceeds.
. Issuing confirmations for transactions in the Fund's shares by
shareholders.
. Distributing current copies of prospectuses, statements of additional
information and shareholder reports.
. Assisting customers in completing application forms, selecting dividend and
other account options and opening any necessary custody accounts.
. Providing account maintenance and accounting support for all transactions.
. Performing such additional shareholder services as may be agreed upon by
the Fund and the Service Agent, provided that any such additional
shareholder services must constitute a permissible non-banking activity in
accordance with the then current regulations of, and interpretations
thereof by, the Board of Governors of the Federal Reserve System, if
applicable.
Rule 12b-1 Distribution Plan
The Distribution Plan permits the portfolio to pay UAMFDI or others for
certain distribution, promotional and related expenses involved in marketing
its Institutional Service Class Shares. Under the Distribution Plan,
Institutional Service Class Shares may pay distribution fees at the maximum
annual rate of 0.75% of the average daily net asset value of such shares held
by the Service Agent for the benefit of its customers. These expenses
include, among other things:
. Advertising the availability of services and products.
. Designing materials to send to customers and developing methods of making
such materials accessible to customers.
. Providing information about the product needs of customers.
. Providing facilities to solicit Fund sales and to answer questions from
prospective and existing investors about the Fund.
30
<PAGE>
. Receiving and answering correspondence from prospective investors,
including requests for sales literature, prospectuses and statements of
additional information.
. Displaying and making available sales literature and prospectuses.
. Acting as liaison between shareholders and the Fund, including obtaining
information from the Fund and providing performance and other information
about the Fund.
In addition, the Institutional Service Class Shares may make payments directly
to other unaffiliated parties, who either aid in the distribution of their
shares or provide services to the Class.
Fees Paid under the Service and Distribution Plans
The Plans permit Institutional Service Class shares to pay distribution and
service fees at the maximum annual rate of 1.00% of the class' average daily
net assets for the year. The Fund's governing board has limited the amount
the Institutional Service Class may pay under the Plans to 0.40% of the class'
average daily net assets for the year, and may increase such amount to the
plan maximum at any time.
The Fund will not reimburse the Distributor or others for distribution
expenses incurred in excess of the amount permitted by the Plans.
Subject to seeking best price and execution, the Fund may buy or sell
portfolio securities through firms that receive payments under the Plans.
UAMFDI, at its own expense, may pay dealers for aid in distribution or for aid
in providing administrative services to shareholders.
<TABLE>
<CAPTION>
Distribution Plan Expenses
------------------------------------------------------------------------------
<S> <C>
FMA Small Company Portfolio $2,189
1999
</TABLE>
Approving, Amending and Terminating the Fund's Distribution Arrangements
Shareholders of the portfolio have approved the Plans. The Plans also were
approved by the governing board of the Fund, including a majority of the
members of the board who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plans (Plan
Members), by votes cast in person at meetings called for the purpose of voting
on these Plans.
Continuing the Plans
The Plans continue in effect from year to year so long as they are approved
annually by a majority of the Fund's board members and its Plan Members. To
continue the Plans, the board must determine whether such continuation is in
the best interest of the Institutional Service Class shareholders and that
there is a reasonable likelihood of the Plans providing a benefit to the
Class. The Fund's board has determined that the Fund's distribution
arrangements are likely to benefit the Fund and its shareholders by enhancing
the Fund's ability to efficiently service the accounts of its Institutional
Service Class shareholders.
Amending the Plans
A majority of the Fund's governing board and a majority of its the Plan
Members must approve any material amendment to the Plans. Likewise, any
amendment materially increasing the maximum percentage payable under the Plans
must be approved by a majority of the outstanding voting securities of the
Class, as well as by a majority of the Plan Members.
Terminating the Plans
A majority of the Plan Members or a majority of the outstanding voting
securities of the Class may terminate the Plans at any time without penalty.
In addition, the Plans will terminate automatically upon their
assignment.
31
<PAGE>
Miscellaneous
So long as the Plans are in effect, the non-interested board members will
select and nominate the Plan Members of the Fund.
The Fund and UAMFDI intend to comply with the Conduct Rules of the National
Association of Securities Dealers relating to investment company sales
charges. with these rules.
Pursuant to the Plans, the board reviews, at least quarterly, a written report
of the amounts expended under each agreement with Service Agents and the
purposes for which the expenditures were made.
Additional Non-12b-1 Shareholder Servicing Arrangements
In addition to payments by the Fund under the Plans, UAM and any of its
affiliates, may, at its own expense, compensate a Service Agent or other
person for marketing, shareholder servicing, record-keeping and/or other
services performed with respect to the Fund, the portfolio or any class of
shares of the portfolio. The person making such payments may do so out of its
revenues, its profits or any other source available to it. Such services
arrangements, when in effect, are made generally available to all qualified
service providers. The adviser may also compensate its affiliated companies
for referring investors to the portfolio.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
32
<PAGE>
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if the
Board specifically approves such continuance every year. The Board or UAMFSI
may terminate the Fund Administration Agreement, without penalty, on not less
than ninety (90) days' written notice. The Fund Administration Agreement
automatically terminates upon its assignment by UAMFSI without the prior
written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
Administration and Transfer Agency Services Fees
The portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, the portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at the
following rates:
Annual Rate
------------------------------------------------------------------------
FMA Small Company Portfolio 0.063%
2. The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is calculated
at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM Funds
Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational class
and $2,500 for each additional class.
For the last three fiscal years the portfolio paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FMA Small Company Portfolio $87,089 $128,860 $215,949
1999
------------------------------------------------------------------------------------------------------------
1998 $62,840 $144,755 $207,595
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C>
1997 $ 1,233 $ 80,327 $ 81,560
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
Brokerage Allocation and Other Practices
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
The Investment Advisory Agreement authorizes the adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the portfolio. The Investment Agreement also directs the adviser to use
its best efforts to obtain the best execution with respect to all transactions
for the portfolio. The adviser may select brokers based on research,
statistical and pricing services they provide to the adviser. Information and
research provided by a broker will be in addition to, and not instead of, the
services the adviser is required to perform under the Investment Advisory
Agreement. In so doing, the portfolio may pay higher commission rates than
the lowest rate available when the adviser believes it is reasonable to do so
in light of the value of the research, statistical, and pricing services
provided by the broker effecting the transaction.
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for
their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for the portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the same
security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolio, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
34
<PAGE>
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, the portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When the portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
Commissions Paid
For the last three fiscal years, the portfolio paid the following in brokerage
commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
------------------------------------------------------------------------------
<S> <C>
FMA Small Company Portfolio
1999 $1,161,191
------------------------------------------------------------------------------
1998 $ 355,571
------------------------------------------------------------------------------
1997 $ 90,657
</TABLE>
Capital Stock and Other Securities
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its name
to "UAM Funds, Inc." The Fund's principal executive office is located at 211
Congress Street, Boston, MA 02110; however, shareholders should direct all
correspondence to the address listed on the cover of this SAI. The Fund is an
open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing board
to issue three billion shares of common stock, with a $.001 par value. The
governing board has the power to create and designate one or more series
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder approval.
When issued and paid for, the shares of each series and class of the Fund are
fully paid and nonassessable, and have no pre-emptive rights or preference as
to conversion, exchange, dividends, retirement or other features.
The shares of each series and class have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of members of the governing board can elect all of the members if they choose
to do so. On each matter submitted to a vote of the shareholders, a
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books
of the Fund. Shares of all classes will vote together as a single class except
when otherwise required by law or as determined by the members of the Fund's
governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
35
<PAGE>
them and recorded on the books of the Fund. The liquidation of any portfolio
or class thereof may be authorized at any time by vote of a majority of the
members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are identical
in all respects. Unlike Institutional and Adviser Class Shares, Institutional
Service Class Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Adviser
Class Shares impose a sales load on purchases. The classes also have
different exchange privileges. The net income attributable to Institutional
Service Class Shares and the dividends payable on Institutional Service Class
Shares will be reduced by the amount of the shareholder servicing and
distribution fees; accordingly, the net asset value of the Institutional
Service Class Shares will be reduced by such amount to the extent a portfolio
has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year so that the portfolio itself generally will be relieved
of federal income and excise taxes. If the portfolio were to fail to so
qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction.
The portfolio's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
Purchase, Redemption and Pricing of Shares
36
<PAGE>
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to the
NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. For purposes of this calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued neither exceeding the asked prices nor less than
the bid prices. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The converted value is based upon the
bid price of the foreign currency against U.S. dollars quoted by any major
bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
37
<PAGE>
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the Fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "How the Fund Values it Assets" at the next
determination of net asset value after acceptance. The Fund will issue shares
of the portfolio at the NAV of the portfolio determined as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and that
there are no restrictions on their resale imposed by the 1933 Act or
otherwise;
. All dividends, interest, subscription, or other rights pertaining to such
securities become the property of the portfolio and are delivered to the
fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all securities
of the same issuer held by the portfolio cannot exceed 5% of the net assets
of the portfolio. This condition does not apply to U.S. government
securities.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for federal income tax purposes depending upon the cost of securities
or local currency exchanged. Investors interested in such exchanges should
contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of shares or
dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and other
organizations.
38
<PAGE>
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to receive
redemption proceeds. To change an account in this manner, you must submit a
written request signed by each shareholder, with each signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable for
any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the UAMSSC
does not employ the procedures described above. Neither the Fund nor the
UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to be
genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment of
redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth
under "Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
39
<PAGE>
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to issue signature
guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any time.
Such instructions may include limiting the amount or frequency of exchanges
and may be for the purpose of assuring such exchanges do not disadvantage the
Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
Performance Calculations
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. The performance is calculated
40
<PAGE>
separately for each Class of the portfolio. Dividends paid by the portfolio
with respect to each Class will be calculated in the same manner at the same
time on the same day and will be in the same amount, except that service fees,
distribution charges and any incremental transfer agency costs relating to
Institutional Service Class Shares will be borne exclusively by that
class.
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in the portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a stated
period. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
The fund calculates the average annual total return of the portfolio by
finding the average annual compounded rates of return over one, five and ten-
year periods that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each one, five and ten-year period and the
deduction of all applicable Fund expenses on an annual basis. Since
Institutional Service Class Shares bear additional service and distribution
expenses, their average annual total return will generally be lower than that
of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P(1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
Set forth in the table below are the portfolio's average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from the
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of 10 Years or
One Year Five Years Since Inception Inception Date
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Class -7.63% 12.36% 12.70% 12/31/92
-----------------------------------------------------------------------------------------------------------------------
Institutional Service Class -7.85% N/A -0.10% 08/01/97
</TABLE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in the portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds. As
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
41
<PAGE>
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
base period. Since Institutional Service Class shares bear additional service
and distribution expenses, their yield will generally be lower than that of
the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period.
COMPARISONS
- --------------------------------------------------------------------------------
The portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported
in financial and industry publications, and various indices as further
described in this SAI. This information may also be included in sales
literature and advertising.
To help investors better evaluate how an investment in the portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated
above) to performance as reported by other investments, indices and averages.
Please see "Comparative Benchmarks" for publications, indices and averages
that may be used.
In assessing such comparisons of performance, an investor should keep in mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by the portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that the portfolio will continue this
performance as compared to such other averages.
Financial Statements
The following documents are included in the portfolio's October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
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. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolio's Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolio's Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Distribution Plan refers to the Distribution Plan the Fund has adopted for its
Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board," the NYSE is located on Wall Street and is the largest exchange in the
United States.
Plan member refers to members of the board who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of the Plans.
Plans refers to the Distribution and Shareholder Servicing Plans the Fund has
adopted for its Service Class Shares pursuant to Rule 12b-1 under the 1940
Act.
SEC is the Securities and Exchange Commission. The SEC is the federal agency
that administers most of the federal securities laws in the United States. In
particular, the SEC administers the 1933 Act, the 1940 Act and the 1934 Act.
Service Plan refers to the Shareholder Servicing Plan the Fund has adopted for
its Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Service Class means the Institutional Service Class shares of a portfolio.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-shareholder-
servicing agent.
43
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BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well-
maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and
asset protection are, nevertheless, expected to be maintained at
adequate levels.
baa An issue that which is rated "baa" is considered to be a medium--
grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of
eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each rating
minus (-) classification: the modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt-edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
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Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals) Bonds
for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in operating experience, (c)
rentals that begin when facilities are completed, or (d) payments
to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
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Prime-1 ssuers rated Prime-1 (or supporting institution) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
. Leading market positions in well-established industries.
. Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
. Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligation.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations
are typically rated lower than senior obligations, to reflect the lower
priority in bankruptcy, as noted above. Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
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AAA An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
Obligations rated 'BB', 'B', 'CCC' , 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposures to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment, and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C A subordinated debt or preferred stock obligation rated 'C' is
CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed or
similar action taken, but payments on this obligation are being
continued. A 'C' will also be assigned to a preferred stock issue in
arrears on dividends or sinking fund payments, but that is currently
paying.
D An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligation linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk - such as
interest-only or principal-only mortgage securities; and obligations
with unusually risky interest terms, such as inverse floaters.
47
<PAGE>
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of
policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the
obligor's capacity to meet its financial commitment on the obligation
is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment
on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poors' believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identity those instances where sovereign risks make them different for the same
issuer.
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DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of economic
conditions.
A+/A/A- Protection factors are average but adequate. However, risk factors
are more variable in periods of greater economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient
BBB- for prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors fluctuate
according to industry conditions. Overall quality may move up or
down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation will
not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
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<PAGE>
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify issues
as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service. Operating
factors and market access may be subject to a high degree of
variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for
timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions
are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be
met. Securities rated in this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable
business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating
indicates that default of some kind appears probable. `C' ratings
signal imminent default.
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DDD,DD,D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated
with any precision, the following serve as general guidelines.
"DDD" obligations have the highest potential for recovery, around
90%-100% of outstanding amounts and accrued interest. "D"
indicates potential recoveries in the range of 50%-90%, and "D"
the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or
all of their obligations. Entities rated "DDD" have the highest
prospect for resumption of performance or continued operation with
or without a formal reorganization process. Entities rated "DD"
and "D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities
rated "D" have a poor prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for timely
payment of financial commitments; may have an added "+" to denote
any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as
in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
Comparative Benchmarks
(alphabetically)
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CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics -- a statistical measure of change, over time in the price
of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange. It has been a widely followed indicator of the stock
market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New York
Times, Personal Investor, The Wall Street Journal and Weisenberger Investment
Companies Service -- publications that rate fund performance over specified
time periods.\
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-weighted
index maintained by the International Finance Corporation. This index
consists of over 890 companies in 26 emerging equity markets, and is designed
to measure more precisely the returns portfolio managers might receive from
investment in emerging markets equity securities by focusing on companies and
markets that are legally and practically accessible to foreign investors.
Lehman Brothers Indices:
------------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues, agency
issues, corporate bond issues and mortgage backed securities. It includes
fixed rate issuers of investment grade (BBB) or higher, with maturities of at
least one year and outstanding par values of at least $100 million for U.S.
government issues and $25 million for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate debt.
Also included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued
debt of U.S. government agencies and quasi-federal corporations, and corporate
debt guaranteed by the U.S. government). In addition to the aggregate index,
sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of
at least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded during
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<PAGE>
the month is held in the index until month end and then removed. All returns
are market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity and
an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with
12 indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment objectives
were changed while other equity objectives remain unchanged. Changing
investment objectives include Capital Appreciation Funds, Growth Funds, Mid-
Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income Funds, and Equity
Income Funds. Unchanged investment objectives include Sector Equity Funds,
World Equity Funds, Mixed Equity Funds, and certain other funds including all
Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group;
2) number of component funds remains the same (30); 3) component funds are
defined annually; 4) can be linked historically; and 5) are used as a
benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but
are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt
issues (BBB or higher) with dollar-weighted average maturities of one to five
years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing 60%
or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by prospectus
or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
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Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to
grow significantly faster than the earnings of the stocks represented in the
major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions, exclusive
of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities
from 1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market value-
weighted averages of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
----------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of
the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000
Index.
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Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell
Top 200 companies with higher price-to-book ratios and higher forecasted
growth values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and does
not reflect any transaction costs. Direct investment in the index is not
possible.
Standard & Poor's U.S. Indices:
-------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10
economic sectors aggregated from 23 industry groups, 59 industries, and 123
sub-industries covering almost 6,000 companies globally. The new
classification standard will be used with all of their respective indices.
Features of the new classification include 10 economic sectors, rather than
the 11 S&P currently uses. Sector and industry gradations are less severe.
Rather than jumping from 11 sectors to 115 industries under the former S&P
system, the new system progresses from 10 sectors through 23 industry groups,
50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its market
value.
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It is used by over 95% of U.S. managers and pension plan sponsors. More than
$25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The
index is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred
benchmark for both active and passive management due to its low turnover and
greater liquidity. Approximately $8 billion is indexed to the S&P SmallCap
600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80%
of the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including 23
electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
---------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
---------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as
the new Canadian large cap benchmark and will ultimately replace the Toronto
35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan --
are represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
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S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad
enough to provide representation of the market, but narrow enough to ensure
liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization)
of the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used
by the institutional investment community as a broad measure of the
performance of public real estate equity for asset allocation and performance
comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
ICM Small Company Portfolio
Institutional Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the portfolio dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolio by contacting the UAM Funds at the address listed
above.
<PAGE>
<TABLE>
Table Of Contents
<S> <C>
Description of Permitted Investments............................... 1
What Investment Strategies May the Portfolio Use?................. 1
Debt Securities................................................... 1
Derivatives....................................................... 8
Equity Securities................................................. 16
Foreign Securities................................................ 18
Investment Companies.............................................. 21
Repurchase Agreements............................................. 22
Restricted Securities............................................. 22
Securities Lending................................................ 22
When Issued Transactions.......................................... 23
Investment Policies of the Portfolio............................... 23
Fundamental Policies.............................................. 24
Non-Fundamental Policies.......................................... 25
Management Of The Fund............................................. 25
Principal Shareholders............................................. 26
Investment Advisory and Other Services............................. 27
Investment Adviser................................................ 27
Distributor....................................................... 30
Shareholder Servicing Arrangements................................ 30
Administrative Services........................................... 30
Custodian......................................................... 32
Independent Accountants........................................... 32
Brokerage Allocation and Other Practices........................... 32
Selection of Brokers.............................................. 32
Simultaneous Transactions......................................... 32
Brokerage Commissions............................................. 33
Capital Stock and Other Securities................................. 33
Description Of Shares And Voting Rights........................... 33
Purchase, Redemption and Pricing of Shares......................... 35
Net Asset Value Per Share......................................... 35
Purchase of Shares................................................ 36
Redemption of Shares.............................................. 36
Exchange Privilege................................................ 38
Transfer Of Shares................................................ 38
Performance Calculations........................................... 39
Total Return...................................................... 39
Yield............................................................. 40
Comparisons....................................................... 40
Financial Statements............................................... 41
Glossary........................................................... 41
Bond Ratings....................................................... 41
Moody's Investors Service, Inc.................................... 42
Standard & Poor's Ratings Services................................ 44
Duff & Phelps Credit Rating Co.................................... 47
Fitch IBCA Ratings................................................ 48
Comparative Benchmarks............................................. 49
</TABLE>
<PAGE>
Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- -------------------------------------------------------------------------------
The portfolio currently intends to use the securities and investment
strategies listed below in seeking its objectives; however, it may at any time
invest in any of the investment strategies described in this SAI. This SAI
describes each of these investments/strategies and their risks. The portfolio
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. The investments that are
italicized are principal strategies and you can find more information on these
techniques in the prospectus of the portfolio. You can find more information
concerning the limits on the ability of the portfolio to use these investments
in "What Are the Investment Strategies of the Portfolio?"
. Equity securities.
. Short-term investments.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
- -------------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return and
repayment of the amount borrowed at maturity. Some debt securities, such as
zero-coupon bonds, do not pay current interest and are purchased at a discount
from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities include
treasury notes, which have initial maturities of one to ten years and treasury
bonds, which have initial maturities of at least ten years and certain types
of mortgage-backed securities that are described under "Mortgage-Backed
Securities" and "Other Asset-Backed Securities." This SAI discusses mortgage-
backed treasury and agency securities in detail in the section called
"Mortgage-Backed Securities" and "Other Asset-Backed Securities."
The full faith and credit of the U.S. government supports treasury securities.
Unlike treasury securities, the full faith and credit of the U.S. government
generally do not back agency securities. Agency securities are typically
supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However,
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<PAGE>
since U.S. government securities are of the highest quality, the credit risk
is minimal. The U.S. government does not guarantee the net asset value of the
assets of the portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors,
the corporation promises to pay investors interest, and repay the principal
amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part or
all of the loan balance before maturity, the effective maturity of a mortgage-
backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The adviser will consider
such insurance and guarantees and the creditworthiness of the issuers thereof
in determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or guarantors will
not meet their obligations under the insurance policies or guarantee
arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of portfolio
shares. To buy GNMA securities, the portfolio may have to pay a premium over
the maturity value of the underlying mortgages, which the portfolio may lose
if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Securities issued by FNMA are agency securities,
which means FNMA, but not the U.S. government, guarantees their timely payment
of principal and interest.
2
<PAGE>
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these issuers
generally offer a higher rate of interest than pools created by GNMA, FNMA &
FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing the portfolio to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, the portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which allow debtors
to reduce their balances by offsetting certain amounts owed on the credit
cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such receivables to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities. Due
to the quantity of vehicles involved and requirements under state laws, asset-
backed securities backed by automobile receivables may not have a proper
security interest in all of the obligations backing such receivables.
3
<PAGE>
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
The portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of asset-backed
securities depends in part on the characteristics of the underlying assets,
the coupon rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying
assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, the portfolio may invest a portion of its assets
in the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a
short-term debt security has a maturity of one year or less.
Bank Obligations
The portfolio will only invest in a security issued by a commercial bank if
the bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
The portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
4
<PAGE>
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. The portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See "Bond Ratings" for a description
of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. Typically, one class will receive
some of the interest and most of the principal, while the other class will
receive most of the interest and the remaining principal. In extreme cases,
one class will receive all of the interest ("interest only" or "IO" class)
while the other class will receive the entire principal sensitive to the rate
of principal payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments may
adversely affect the yield to maturity of IOs. Slower than anticipated
prepayments of principal may adversely affect the yield to maturity of a PO.
The yields and market risk of interest only and principal only stripped
mortgage-backed securities, respectively, may be more volatile than those of
other fixed income securities, including traditional mortgage-backed
securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See
"FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold
at a discount from their face value. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. The amount of the
discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security
will have a longer duration than an ordinary debt security with the same
maturity. The portfolio's investments in pay-in-kind, delayed and zero coupon
bonds may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once
the holder of the security has stripped or separated corpus and coupons, it
may sell each component separately. The
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principal or corpus is then sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. Typically, the
coupons are sold separately or grouped with other coupons with like maturity
dates and sold bundled in such form. The underlying treasury security is held
in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof.
Purchasers of stripped obligations acquire, in effect, discount obligations
that are economically identical to the zero coupon securities that the
Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," the portfolio can record its beneficial ownership of the coupon
or corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity of
a debt security is usually its nearest call date.
The portfolio that invests in debt securities has no real maturity. Instead,
it calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by the portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or the portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years --
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
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Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation for
assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and complete
repayment of principal is less certain. The credit rating or financial
condition of an issuer may affect the value of a debt security. Generally,
the lower the quality rating of a security, the greater the risks that the
issuer will fail to pay interest and return principal. To compensate investors
for taking on increased risk, issuers with lower credit ratings usually offer
their investors a higher "risk premium" in the form of higher interest rates
above comparable Treasuries securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an adjustment
to this "risk premium." Since an issuer's outstanding debt carries a fixed
coupon, adjustments to the risk premium must occur in the price, which effects
the yield to maturity of the bond. If an issuer defaults or becomes unable to
honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause the portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
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Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolio currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's opinion,
not an absolute standard of quality, and they do not reflect an evaluation of
market risk. The section "Bond Ratings" contains further information
concerning the ratings of certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time the portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. The portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner, to
reduce transaction costs or to remain fully invested. They may also invest in
derivatives to protect it from broad fluctuations in market prices, interest
rates or foreign currency exchange rates. Investing in derivatives for these
purposes is known as "hedging." When hedging is successful, the portfolio will
have offset any depreciation in the value of its portfolio securities by the
appreciation in the value of the derivative position. Although techniques
other than the sale and purchase of derivatives could be used to control the
exposure of the portfolio to market fluctuations, the use of derivatives may
be a more effective means of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party sells
and the other party agrees to buy a specified amount of a financial instrument
at an agreed upon price and time. The financial instrument underlying the
contract may be a stock, stock index, bond, bond index, interest rate, foreign
exchange rate or other similar instrument. Agreeing to buy the underlying
financial information is called buying a futures contract or taking a long
position in the contract. Likewise, agreeing to sell the underlying financial
instrument is called selling a futures contract or taking a short position in
the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit "initial margin" with a futures broker, known as a futures commission
merchant, when they enter into the contract. Initial margin deposits are
typically equal to a percentage of the contract's value. After they open a
futures contract, the parties to the transaction must compare the purchase
price of the contract to its daily market value. If the value of the futures
contract changes in such a way that a party's position declines, that party
must make additional "variation margin" payments so that the margin payment is
adequate. On the other hand, the value of the contract may change in such a
way that there is excess margin on deposit, possibly entitling the party that
has a gain to receive all or a portion of this amount. This process is known
as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the sale
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price upon closing out the contract is less than the original purchase price,
the person closing out the contract will realize a loss. If the sale price
upon closing out the contract is more that the original purchase price, the
person closing out the contract will realize a gain. The opposite is also
true. If the purchase price upon closing out the contract is more than the
original sale price, the person closing out the contract will realize a loss.
If the purchase price upon closing out the contract is less than the original
sale price, the person closing out the contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the exercise price
plus the premium paid and related transaction costs. Otherwise, the portfolio
would realize either no gain or a loss on the purchase of the call
option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
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Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may cancel
an over-the-counter option by entering into an offsetting transaction with the
counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put option
to expire and the premium it received to offset the increase in the security's
value. If security prices remain the same over time, the portfolio would hope
to profit by closing out the put option at a lower price. If security prices
fall, the portfolio may lose an amount of money equal to the difference
between the value of the security and the premium it received. Writing covered
put options may deprive the portfolio of the opportunity to profit from a
decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices; or
. Maintaining the entire exercise price in liquid securities.
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Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option).
If the option is exercised, the parties will be subject to the futures
contracts. In addition, the writer of an option on a futures contract is
subject to initial and variation margin requirements on the option position.
Options on futures contracts are traded on the same contract market as the
underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead
of selling or buying futures contracts. The portfolio may buy a put option on
a futures contract for the same reasons it would sell a futures contract. It
also may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures
contracts, such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the portfolio would retain the option premium, which would offset, in part,
any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if the market price declines, the
portfolio would pay more than the market price for the underlying instrument.
The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to
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cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded only on exchanges regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
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Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing rates,
security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the portfolio,
the portfolio must be prepared to make such payments when due. In addition, if
the counter-party's creditworthiness declined, the value of a swap agreement
would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the
prior written consent of the other party. The portfolio may be able to
eliminate its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counter-party is unable to
meet its obligations under the contract, declares bankruptcy, defaults or
becomes insolvent, the portfolio may not be able to recover the money it
expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the SEC. If the portfolio enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the portfolio's accrued obligations under the
swap agreement over the accrued amount the portfolio is entitled to receive
under the agreement. If the portfolio enters into a swap agreement on other
than a net basis, it will segregate assets with a value equal to the full
amount of the portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of interest
rate cash flow on specified dates in the future. Some of the different types
of interest rate swaps are "fixed-for floating rate swaps," "termed basis
swaps" and "index amortizing swaps." Fixed-for floating rate swap involve the
exchange of fixed interest rate cash flows for floating rate cash flows.
Termed basis swaps entail cash flows to both parties based on floating
interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the portfolio enters into a swap where it agrees to exchange a
floating rate of interest for a fixed rate of interest, the portfolio may have
to pay more money than it receives. Similarly, if the portfolio enters into a
swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the portfolio may receive less money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in which
one party agrees to make interest rate payments in one currency and the other
promises to make interest rate payments in another currency. A portfolio may
enter into a currency swap when it has one currency and desires a different
currency. Typically the interest rates
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that determine the currency swap payments are fixed, although occasionally one
or both parties may pay a floating rate of interest. Unlike an interest rate
swap, however, the principal amounts are exchanged at the beginning of the
contract and returned at the end of the contract. Changes in foreign exchange
rates and changes in interest rates, as described above may negatively affect
currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the portfolio than if it had not entered into
any derivatives transactions. Derivatives may magnify the portfolio's gains or
losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities the portfolio is hedging may not move
in the same amount, or even in the same direction as the hedging instrument.
The adviser will try to minimize this risk by investing only in those
contracts whose behavior it expects to resemble the portfolio securities it is
trying to hedge. However, if the portfolio's prediction of interest and
currency rates, market value, volatility or other economic factors is
incorrect, the portfolio may lose money, or may not make as much money as it
expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
. current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
. differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on
a broad market index. Since narrower indices are made up of a smaller number
of
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securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration in
the issuer's creditworthiness. Because the value of the portfolio's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the portfolio's investments precisely over
time
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange
the contract was initially traded. Although a portfolio intends to purchase
options and futures only where there appears to be an active market, there is
no guarantee that such a liquid market will exist. If there is no secondary
market for the contract, or the market is illiquid, the portfolio may not be
able to close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage firm
or clearing house or other occurrences may disrupt normal trading activity;
or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
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Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, a portfolio may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative prices have
occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves
up.
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Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life, usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued
together with a debt security or preferred stock and that give the holder the
right to buy proportionate amount of common stock at a specified price.
Warrants are freely transferable and are traded on major exchanges. Unlike
rights, warrants normally have a life that is measured in years and entitles
the holder to buy common stock of a company at a price that is usually higher
than the market price at the time the warrant is issued. Corporations often
issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of
their small or medium size, limited markets and financial resources, narrow
product lines and frequent lack of management depth. The securities of small
and medium companies are often traded in the over-the-counter market and might
not be traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and
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medium capitalization companies are likely to be less liquid, and subject to
more abrupt or erratic market movements, than securities of larger, more
established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities. EDRs are similar to ADRs, except that they are
typically issued by European Banks or trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. Investments in these investment funds
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are subject to the provisions of the 1940 Act. Shareholders of a UAM Fund that
invests in such investment funds will bear not only their proportionate share
of the expenses of the UAM Fund (including operating expenses and the fees of
the adviser), but also will bear indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may trade at
a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in foreign
securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit the portfolio's ability to invest in a particular country or
make it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and
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sophistication, are generally not as developed as the markets in the United
States. Foreign stocks markets tend to differ from those in the United States
in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the
United States dollar will result in a corresponding change in value of
securities denominated in that currency. Some of the factors that may impair
the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover
a portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
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Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that adopt the Euro
in all aspects of the investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custody and accounting. Some of the
uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
The portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by the portfolio. Like other shareholders, the portfolio
would pay its proportionate share of those fees. Consequently, shareholders of
the portfolio would pay not only the management fees of the portfolio, but
also the management fees of the investment company in which the
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portfolio invests. The portfolio may invest up to 10% of its total assets in
the securities of other investment companies, but may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the outstanding securities of any one investment company.
The SEC has granted an order that allows the portfolio to invest the greater
of 5% of its total assets or $2.5 million in the UAM DSI Money Market
Portfolio, provided that the investment is:
. For cash management purposes;
. Consistent with the portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The portfolio will bear expenses of the UAM DSI Money Market Portfolio on the
same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
- -------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolio normally uses repurchase agreements to earn
income on assets that are not invested.
When the portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before the portfolio can sell it and the portfolio might incur
expenses in enforcing its rights.
RESTRICTED SECURITIES
- ------------------------------------------------------------------------------
The portfolio may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of these
securities could be more or less than those originally paid by the portfolio
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
- ------------------------------------------------------------------------------
The portfolio may lend a portion of its total assets to broker- dealers or
other financial institutions. It may then reinvest the collateral it receives
in short-term securities and money market funds. When the portfolio lends its
securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U. S.
government;
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. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, the
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future. In
each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or deliver securities
until a later date. Typically, no income accrues on securities the portfolio
has committed to purchase before the securities are delivered, although the
portfolio may earn income on securities it has in a segregated account. The
portfolio will only enter into these types of transactions with the intention
of actually acquiring the securities, but may sell them before the settlement
date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolio
The portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, the
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
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FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following investment limitations are fundamental, which means the
portfolio cannot change them without approval by the vote of a majority of the
outstanding voting securities of the portfolio, as defined by the 1940 Act.
The portfolio will not:
The portfolio will not:
. with respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities);
. with respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer; borrow money, except from
banks and as a temporary measure for extraordinary or emergency purposes
and then, in no event, in excess of 10% of the portfolio's gross assets
valued at the lower of market or cost;
. invest for the purpose of exercising control over management of any
company;
. invest in commodities except that the portfolio may invest in futures
contracts and options to the extent that not more than 5% of the
portfolio's assets are required as deposit to secure obligations under
futures contracts;
. invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
has adopted a temporary defensive position;
. invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years;
. invest more than an aggregate of 10% of the net assets of the portfolio,
determined at the time of investment, in securities subject to legal or
contractual restrictions on resale or securities for which there are no
readily available markets, including repurchase agreements having
maturities of more than seven days;
. issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the portfolio from (1) making
any permitted borrowings, mortgages or pledges, or (2) entering into
options, futures or repurchase transactions;
. make loans except by purchasing debt securities in accordance with its
investment objective and policies or entering into repurchase agreements,
or by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as the loans are made in compliance with the
1940 Act or the rules and regulations or interpretations of the SEC;
. pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value; and
. purchase additional securities when borrowings exceed 5% of total assets;
. purchase on margin or sell short, except as provided herein;
. purchase or retain securities of an issuer if those officers and Directors
of the Fund or its investment adviser owning more than 1/2 1/2 of 1% of
such securities together own more than 5% of such securities;
. purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate and may purchase and sell securities
which are secured by interests in real estate;
. underwrite the securities of other issuers;
. write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
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NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the portfolio may
change them without shareholder approval. The portfolio will not:
The portfolio will not:
. invest more than 20% of the portfolio's assets in American Depositary
Receipts.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to execute
policies the board has formulated. The Fund pays each board member who is not
also an officer or affiliated person (independent board member) a $150
quarterly retainer fee per active portfolio and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and
other expenses incurred while attending board meetings. The $2,000 meeting fee
and expense reimbursements are aggregated for all of the board members and
allocated proportionately among the portfolios of the UAM Funds Complex. The
Fund does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from the
UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act. Mr.
English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in the
UAM Funds Complex. However, the Fund does not believe that the relationship is
a material business relationship, and, therefore, does not consider him to be
an "interested person" of the Fund. If these circumstances change, the Board
will determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
Position From the Fund Complex as of
Name, Address, with Principal Occupations During the as of October October 31,
DOB Fund Past 5 years 31, 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management Company, $7,137 $10,625
College Road -- RFD 3 Member Inc. and Great Island Investment Company, Inc.;
Meredith, NH 03253 President of Bennett Management Company from 1988
1/26/29 to 1993.
- ---------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund since $7,137 $10,625
1250 24/th/ St., NW Member January 1999; Vice President for Finance and
Washington, DC 20037 Administration and Treasurer of Radcliffe College
8/14/51 from 1991 to 1999.
- ---------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief Administrative $7,137 $10,625
100 King Street West Member Officer of Philip Services Corp.; Formerly, a Partner
P.O. Box 2440, LCD-1 in the Philadelphia office of the law firm Dechert
Hamilton Ontario, Price & Rhoads and a Director of Hofler Corp.
Canada L8N-4J6
4/21/42
- ---------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of Broventure $7,137 $10,625
16 West Madison Street Member Company, Inc.; Chairman of the Board of Chektec
Baltimore, MD 21201 Corporation and Cyber Scientific, Inc.
8/5/48
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
Position From the Fund Complex as of
Name, Address, with Principal Occupations During the as of October October 31,
DOB Fund Past 5 years 31, 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James P. Pappas* Board President of UAM Investment Services, Inc. since 0 0
211 Congress Street Member March 1999; Vice President UAM Trust Company since
Boston, MA 02110 January 1996; Principal of UAM Fund Distributors,
2/24/53 Inc. since December 1995; Vice President of UAM
Investment Services, Inc. from January 1996 to March
1999 and a Director and Chief Operating Officer of CS
First Boston Investment Management from 1993-1995.
- ---------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director of 0 0
One International Place Member; United Asset Management Corporation; Director,
Boston, MA 02110 President Partner or Trustee of each of the Investment
3/21/35 and Chairman Companies of the Eaton Vance Group of Mutual Funds.
- ---------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of Dewey 0 0
One Financial Center Member Square Investors Corporation since 1988; Director and
Boston, MA 02111 Chief Executive Officer of H.T. Investors, Inc.,
7/1/43 formerly a subsidiary of Dewey Square.
- ---------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial Officer 0 0
One International Place President of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- ---------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of the 0 0
211 Congress Street Fidelity Group of Mutual Funds from 1991 to 1995;
Boston, MA 02110 held various other offices with Fidelity Investments
7/4/51 from November 1990 to March 1995.
- ---------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase Global Fund
Boston, MA 02110 Services Company from 1995 to 1996; Senior Manager of
9/18/63 Deloitte & Touche LLP from 1985 to 1995,
- ---------------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI Investments; 0 0
SEI Investments Treasurer Senior Manager at Arthur Andersen prior to 1994.
One Freedom Valley Rd.
Oaks, PA 19456
12/17/63
</TABLE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Class
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Washington Suburban Sanitary Commission
14501 Sweitzer Lane
Laurel, MD 20707-5902 9.72% Institutional
- --------------------------------------------------------------------------------------------------------------
Major League Baseball Players Benefit Plan
c/o Investment Counselors of MD
Attn: Anne D. Benson
803 Cathedral Street
Baltimore, MD 32302-5237 8.59% Institutional
- --------------------------------------------------------------------------------------------------------------
Strafe & CO
FAO Riverside Methodist Hospital Foundation
PO Box 160
Westerville, OH 43086-0160 5.68% Institutional
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Class
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Trust Company of North Carolina
Attn: Trust Accounting
PO Box 26262
Greensboro, NC 27420 5.18% Institutional
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolio.
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Investment Counselors of Maryland, Inc., a Maryland corporation located at 803
Cathedral Street, Baltimore, Maryland 21201, is the investment adviser to the
portfolio. The adviser manages and supervises the investment of the
portfolio's assets on a discretionary basis. The adviser, an affiliate of
United Asset Management Corporation, has provided investment management
services to corporations, pension and profit sharing plans, trusts, estates
and other institutions and individuals.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds Complex.
Portfolio Management
A team of investment professionals is primarily responsible for the day-to-day
management of the portfolios. Listed below are the investment professionals
that comprise that team and a brief description of their business experience.
<TABLE>
<CAPTION>
Name and Title Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
William V. Heaphy Mr. Heaphy joined the adviser in 1994 as a security analyst in the equity research
Vice President department. Prior to joining the adviser, Mr. Heaphy was an associate in the Baltimore
law firm of Ober, Kaler, Grimes and Shriver, and before that, a staff auditor with
Price Waterhouse. Mr. Heaphy earned his law degree from the University of Maryland
School of Law and his B.S. from Lehigh University. He is a Certified Public Accountant
and Chartered Financial Analyst.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name and Title Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Robert D. McDorman, Jr. Mr. McDorman joined in June 1985. His primary responsibilities are the management of
Principal and Chief Investment ICM Small Company Portfolio and related separate accounts and equity security analysis.
Officer Before joining the adviser, Mr. McDorman managed the Financial Industrial Income Fund.
Mr. McDorman earned his B.A. degree at Trinity College and his law degree at the
University of Baltimore. He is a Chartered Financial Analyst. Mr. McDorman has
managed the portfolio since its inception.
Simeon F. Wooten, III Mr. Wooten joined the adviser in 1998 as a research analyst and as a member of the
Senior Vice President management team of the ICM Small Company Portfolio. Prior to joining the adviser, he
served as Vice President/Research at Adams Express Company, which he joined in 1980.
He is a graduate of the Wharton School of the University of Pennsylvania. Mr. Wooten
is a Chartered Financial Analyst and Certified Public Accountant.
</TABLE>
Listed below are additional members of the adviser's team of professionals and
a brief description of their business experience.
<TABLE>
<CAPTION>
Name and Title Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Paul L. Borssuck Mr. Borssuck joined the adviser in 1985 and heads the firm's Individual Capital
Principal Management Division. Prior to joining the adviser, Mr. Borssuck served as Chairman of
the Investment Policy Committee at Mercantile-Safe Deposit and Trust Company where he
managed portfolios for high net worth clients. Prior to that, he headed the
institutional funds management section at American Security and Trust Company in
Washington, D.C. Mr. Borssuck earned his B.S. degree and M.B.A. from Lehigh
University. He is a Chartered Financial Analyst.
- ---------------------------------------------------------------------------------------------------------------------------
Robert F. Boyd Mr. Boyd joined the advisor in 1995 as Director of Research - Large and Mid Cap
Principal Equities. Prior to joining the advisor. Mr. Boyd was a Managing Director and
Portfolio Manager at Brandywine Asset Management. Prior to that, he was Senior Vice
President and Director of Research at Mercantile-0Sage Deposit & Trust Company. Robby
earned his B.S. degree at the University of Virginia and his M.B.A. at Columbia
University, after which he joined Smith Barney. He is a Chartered Financial Analyst.
- ---------------------------------------------------------------------------------------------------------------------------
Stuart M. Christhilf, III Mr. Christhilf joined ICM in 1998. In addition to managing the firm's operations, he
Principal and directs the marketing effort for Individual Capital Management. Prior to joining ICM,
Chief Executive Officer Stuart was President of a re-insurance agency and earlier served as head of Kidder
Peabody's Mid-Atlantic Institutional Sales effort. He holds his BA from the University
of Virginia and an MBA in Finance from Loyola College. He presently sits on the Boards
of Loyola High School and the Friends of Modern Art of the Baltimore Museum of Art.
- ---------------------------------------------------------------------------------------------------------------------------
Andrew L. Gilchrist Mr. Gilchrist joined the adviser in 1996 as Director of Investment Technology. Prior
Principal and Treasurer to the adviser, Mr. Gilchrist served as Director of Investment Technology at
Mercantile-Safe Deposit and Trust Company for 18 years. Before that, he was with
Merrill Lynch. Mr. Gilchrist graduated with honors in Economics from the University of
Maryland and earned a Masters from The Johns Hopkins University. He is a member of
the Society of Quantitative Analysts.
Julie L. Hale Ms. Hale joined the adviser in 1998 with seventeen years of investment experience.
Senior Vice President Prior to joining the adviser, she was a Senior Vice President and mutual fund manager
for NationsBank Corporation from 1991 to 1998. She has a B.S. degree from Mt. St.
Mary's College and an M.B.A. from Kent State University. Ms. Hale is a Chartered
Financial Analyst and a member of the National Association of Petroleum Investment
Analysts (NAPIA).
Stephen T. Scott Mr. Scott specializes in the management of pension assets, private foundations and
Principal and President endowments. He joined the adviser in 1973 after having served as portfolio manager at
Chase Manhattan Bank and Mercantile-Safe Deposit and Trust Company. He is a graduate
of Randolph-Macon College and received an M.B.A. from Columbia University Graduate
School of Business.
</TABLE>
28
<PAGE>
Investment Advisory Agreement
This section summarizes some of the important provisions of the Investment
Advisory Agreement. The Fund has filed the Investment Advisory Agreement with
the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
The adviser:
. Manages the investment and reinvestment of the portfolio's assets;
. Continuously reviews, supervises and administers the investment program of
the portfolio; and
. Determines what portion of the portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Investment Advisory Agreement, (2) reckless disregard by the adviser of
its obligations and duties under the Investment Advisory Agreement, or (3) a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
The Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
29
<PAGE>
Advisory Fees
For its services, the portfolio pays its adviser a fee equal to of the
average daily net assets of the portfolio. Due to the effect of fee waivers by
the adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For the last three fiscal years, the portfolio
paid the following in management fees to the adviser:
Investment Advisory Fees Paid
- --------------------------------------------------------------------------------
ICM Small Company Portfolio
1999 $4,391,761
- --------------------------------------------------------------------------------
1998 $4,163,155
- --------------------------------------------------------------------------------
1997 $2,852,097
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services. UAMFDI, an affiliate of UAM, is located at 211
Congress Street, Boston, Massachusetts 02110.
SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------
UAM and each of its affiliates, may, at its own expense, compensate a Service
Agent or other person for marketing, shareholder servicing, record-keeping
and/or other services performed with respect to the Fund or the portfolio. The
person making such payments may do so out of its revenues, its profits or any
other source available to it. Such services arrangements, when in effect, are
made generally available to all qualified service providers. The adviser may
also compensate its affiliated companies for referring investors to the
portfolio.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
30
<PAGE>
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if
the Board specifically approves such continuance every year. The Board or
UAMFSI may terminate the Fund Administration Agreement, without penalty, on
not less than ninety (90) days' written notice. The Fund Administration
Agreement automatically terminates upon its assignment by UAMFSI without the
prior written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
Administration and Transfer Agency Services Fees
The portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, the portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at
the following rates:
Annual Rate
-------------------------------------------------------------------------
ICM Small Company Portfolio 0.063%
2. The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is
calculated at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM Funds
Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
31
<PAGE>
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational
class and $2,500 for each additional class.
For the last three fiscal years the portfolio paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ICM Small Company Portfolio
1999 $251,348 $314,423 $ 565,771
-------------------------------------------------------------------------------------------------------------
1998 $801,694 $544,957 $1,346,651
-------------------------------------------------------------------------------------------------------------
1997 $555,980 $393,014 $ 948,994
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
Brokerage Allocation and Other Practices
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
The Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect to
all transactions for the portfolio. The adviser may select brokers based on
research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and not
instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes it
is reasonable to do so in light of the value of the research, statistical,
and pricing services provided by the broker effecting the transaction.
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for
their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for the portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the
same security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolio, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
32
<PAGE>
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, the portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When the portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
Commissions Paid
For the last three fiscal years, the portfolio paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
----------------------------------------------------------------------------
<S> <C>
ICM Small Company Portfolio
1999 $1,046,123
----------------------------------------------------------------------------
1998 $ 547,879
----------------------------------------------------------------------------
1997 $ 264,115
</TABLE>
Capital Stock and Other Securities
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its name
to "UAM Funds, Inc." The Fund's principal executive office is located at 211
Congress Street, Boston, MA 02110; however, shareholders should direct all
correspondence to the address listed on the cover of this SAI. The Fund is an
open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing board
to issue three billion shares of common stock, with a $.001 par value. The
governing board has the power to create and designate one or more series
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder approval.
When issued and paid for, the shares of each series and class of the Fund are
fully paid and nonassessable, and have no pre-emptive rights or preference as
to conversion, exchange, dividends, retirement or other features.
33
<PAGE>
The shares of each series and class have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of members of the governing board can elect all of the members if they choose
to do so. On each matter submitted to a vote of the shareholders, a
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books
of the Fund. Shares of all classes will vote together as a single class except
when otherwise required by law or as determined by the members of the Fund's
governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. The liquidation of any portfolio
or class thereof may be authorized at any time by vote of a majority of the
members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are identical
in all respects. Unlike Institutional and Adviser Class Shares, Institutional
Service Class Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Adviser
Class Shares impose a sales load on purchases. The classes also have
different exchange privileges. The net income attributable to Institutional
Service Class Shares and the dividends payable on Institutional Service Class
Shares will be reduced by the amount of the shareholder servicing and
distribution fees; accordingly, the net asset value of the Institutional
Service Class Shares will be reduced by such amount to the extent a portfolio
has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year so that the portfolio itself generally will be relieved
of federal income and excise taxes. If the portfolio were to fail to so
qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction.
34
<PAGE>
The portfolio's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to the
NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. For purposes of this calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued neither exceeding the asked prices nor less than
the bid prices. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The converted value is based upon the
bid price of the foreign currency against U.S. dollars quoted by any major
bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
35
<PAGE>
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the Fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "How the Fund Values it Assets" at the next
determination of net asset value after acceptance. The Fund will issue shares
of the portfolio at the NAV of the portfolio determined as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and that
there are no restrictions on their resale imposed by the 1933 Act or
otherwise;
. All dividends, interest, subscription, or other rights pertaining to such
securities become the property of the portfolio and are delivered to the
fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all securities
of the same issuer held by the portfolio cannot exceed 5% of the net assets
of the portfolio. This condition does not apply to U.S. government
securities.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for federal income tax purposes depending upon the cost of securities
or local currency exchanged. Investors interested in such exchanges should
contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
36
<PAGE>
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of shares or
dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and other
organizations.
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to receive
redemption proceeds. To change an account in this manner, you must submit a
written request signed by each shareholder, with each signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable for
any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the UAMSSC
does not employ the procedures described above. Neither the Fund nor the
UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to be
genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment of
redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth
under "Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
37
<PAGE>
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to issue signature
guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any time.
Such instructions may include limiting the amount or frequency of exchanges
and may be for the purpose of assuring such exchanges do not disadvantage the
Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
38
<PAGE>
Performance Calculations
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC.
TOTAL RETURN
Total return is the change in value of an investment in the portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a stated
period. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
The fund calculates the average annual total return of the portfolio by
finding the average annual compounded rates of return over one, five and ten-
year periods that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each one, five and ten-year period and the
deduction of all applicable Fund expenses on an annual basis. Since
Institutional Service Class Shares bear additional service and distribution
expenses, their average annual total return will generally be lower than that
of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
Set forth in the table below are the portfolio's average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from the
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of
10 Years or Since
One Year Five Years Inception Inception Date
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ICM Small Company Portfolio -0.13% 13.09% 14.66% 04/19/89
</TABLE>
39
<PAGE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in the portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds. As
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
base period. Since Institutional Service Class shares bear additional service
and distribution expenses, their yield will generally be lower than that of
the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period.
COMPARISONS
- --------------------------------------------------------------------------------
The portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported
in financial and industry publications, and various indices as further
described in this SAI. This information may also be included in sales
literature and advertising.
To help investors better evaluate how an investment in the portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated
above) to performance as reported by other investments, indices and averages.
Please see "Comparative Benchmarks" for publications, indices and averages
that may be used.
In assessing such comparisons of performance, an investor should keep in mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by the portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that the portfolio will continue this
performance as compared to such other averages.
40
<PAGE>
Financial Statements
The following documents are included in the portfolio's October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolio's Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolio's Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board," the NYSE is located on Wall Street and is the largest exchange in the
United States.
SEC is the Securities and Exchange Commission. The SEC is the federal agency
that administers most of the federal securities laws in the United States. In
particular, the SEC administers the 1933 Act, the 1940 Act and the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-serving agents.
Bond Ratings
41
<PAGE>
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will
remain relatively well-maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and
asset protection are, nevertheless, expected to be maintained at
adequate levels.
baa An issue that which is rated "baa" is considered to be a
medium--grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate at
present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood
of eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each rating
minus (-) classification: the modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt-edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may
be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the
Aaa securities.
42
<PAGE>
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals) Bonds
for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis
of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
43
<PAGE>
Prime-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
. Leading market positions in well-established industries.
. Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
. Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's Ratings Services
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations
are typically rated lower than senior obligations, to reflect the lower
priority in bankruptcy, as noted above. Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
44
<PAGE>
AAA An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to meet
its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the
obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposures to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment,
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on
the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated 'C' is
CURRENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been
filed or similar action taken, but payments on this obligation
are being continued. A 'C' will also be assigned to a preferred
stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the
credit rating. Examples include: obligation linked or indexed to
equities, currencies, or commodities; obligations exposed to
severe prepayment risk - such as interest-only or principal-only
mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
45
<PAGE>
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that
Standard & Poor's does not rate a particular obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not
expired, unless Standard & Poors' believes that such payments
will be made during such grace period. The 'D' rating also will
be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign
currency issuer ratings are also distinguished from local currency issuer
ratings to identity those instances where sovereign risks make them different
for the same issuer.
46
<PAGE>
DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of
economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient
BBB- for prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors
fluctuate according to industry conditions. Overall quality may
move up or down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation will
not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating
grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-
free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
47
<PAGE>
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity
for timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions
are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial
alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment
grade.
B Highly speculative. `B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity
for continued payment is contingent upon a sustained, favorable
business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating
indicates that default of some kind appears probable. `C' ratings
signal imminent default.
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<PAGE>
DDD,DD,D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated
with any precision, the following serve as general guidelines.
"DDD" obligations have the highest potential for recovery, around
90%-100% of outstanding amounts and accrued interest. "D"
indicates potential recoveries in the range of 50%-90%, and "D"
the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or
all of their obligations. Entities rated "DDD" have the highest
prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated
"DD" and "D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities
rated "D" have a poor prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for timely
payment of financial commitments; may have an added "+" to denote
any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as
great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
Comparative Benchmarks
(Alphabetically)
49
<PAGE>
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics -- a statistical measure of change, over time in the price
of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange. It has been a widely followed indicator of the stock
market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New York
Times, Personal Investor, The Wall Street Journal and Weisenberger Investment
Companies Service -- publications that rate fund performance over specified
time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-weighted
index maintained by the International Finance Corporation. This index
consists of over 890 companies in 26 emerging equity markets, and is designed
to measure more precisely the returns portfolio managers might receive from
investment in emerging markets equity securities by focusing on companies and
markets that are legally and practically accessible to foreign investors.
Lehman Brothers Indices:
------------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues, agency
issues, corporate bond issues and mortgage backed securities. It includes
fixed rate issuers of investment grade (BBB) or higher, with maturities of at
least one year and outstanding par values of at least $100 million for U.S.
government issues and $25 million for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate debt.
Also included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index - an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued
debt of U.S. government agencies and quasi-federal corporations, and corporate
debt guaranteed by the U.S. government). In addition to the aggregate index,
sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of
at least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded
during
50
<PAGE>
the month is held in the index until month end and then removed. All returns
are market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity and
an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with
12 indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment objectives
were changed while other equity objectives remain unchanged. Changing
investment objectives include Capital Appreciation Funds, Growth Funds, Mid-
Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income Funds, and Equity
Income Funds. Unchanged investment objectives include Sector Equity Funds,
World Equity Funds, Mixed Equity Funds, and certain other funds including all
Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group;
2) number of component funds remains the same (30); 3) component funds are
defined annually; 4) can be linked historically; and 5) are used as a
benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but
are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt
issues (BBB or higher) with dollar-weighted average maturities of one to five
years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing 60%
or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by prospectus
or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
51
<PAGE>
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to
grow significantly faster than the earnings of the stocks represented in the
major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions, exclusive
of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities
from 1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market value-
weighted averages of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
----------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of
the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000
Index.
52
<PAGE>
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell
Top 200 companies with higher price-to-book ratios and higher forecasted
growth values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and does
not reflect any transaction costs. Direct investment in the index is not
possible.
Standard & Poor's U.S. Indices:
-------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10
economic sectors aggregated from 23 industry groups, 59 industries, and 123
sub-industries covering almost 6,000 companies globally. The new
classification standard will be used with all of their respective indices.
Features of the new classification include 10 economic sectors, rather than
the 11 S&P currently uses. Sector and industry gradations are less severe.
Rather than jumping from 11 sectors to 115 industries under the former S&P
system, the new system progresses from 10 sectors through 23 industry groups,
50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its market
value.
53
<PAGE>
It is used by over 95% of U.S. managers and pension plan sponsors. More than
$25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The
index is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred
benchmark for both active and passive management due to its low turnover and
greater liquidity. Approximately $8 billion is indexed to the S&P SmallCap
600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80%
of the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including 23
electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
---------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
---------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as
the new Canadian large cap benchmark and will ultimately replace the Toronto
35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan --
are represented in the new index.
S&P Latin America 40 Index - part of the S&P Global 1200 Index, includes
highly liquid securities from major economic sectors of Mexican and South
American equity markets. Companies from Mexico, Brazil, Argentina, and Chile
are represented in the new index.
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<PAGE>
S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad
enough to provide representation of the market, but narrow enough to ensure
liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization)
of the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used
by the institutional investment community as a broad measure of the
performance of public real estate equity for asset allocation and performance
comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
55
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The McKee Portfolios
McKee U.S. Government Portfolio
McKee Domestic Equity Portfolio
McKee International Equity Portfolio
McKee Small Cap Equity Portfolio
Institutional Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the portfolios dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address listed
above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments............................................................... 1
What Investment Strategies May the Portfolios Use?.............................................. 1
Debt Securities................................................................................. 2
Derivatives..................................................................................... 9
Equity Securities.............................................................................. 17
Foreign Securities............................................................................. 19
Investment Companies........................................................................... 23
Repurchase Agreements.......................................................................... 23
Restricted Securities.......................................................................... 23
Securities Lending............................................................................. 24
When Issued Transactions....................................................................... 24
Investment Policies of the Portfolios............................................................. 25
Fundamental Policies........................................................................... 25
Non-Fundamental Policies....................................................................... 26
Management Of The Fund............................................................................ 26
Principal Shareholders............................................................................ 27
Investment Advisory and Other Services............................................................ 30
Investment Adviser............................................................................. 30
Distributor.................................................................................... 32
Shareholder Servicing Arrangements............................................................. 32
Administrative Services........................................................................ 33
Custodian...................................................................................... 34
Independent Accountants........................................................................ 34
Brokerage Allocation and Other Practices.......................................................... 34
Selection of Brokers........................................................................... 34
Simultaneous Transactions...................................................................... 34
Brokerage Commissions.......................................................................... 35
Capital Stock and Other Securities................................................................ 35
Description Of Shares And Voting Rights........................................................ 36
Purchase, Redemption and Pricing of Shares........................................................ 37
Net Asset Value Per Share...................................................................... 37
Purchase of Shares............................................................................. 38
Redemption of Shares........................................................................... 39
Exchange Privilege............................................................................. 41
Transfer Of Shares............................................................................. 41
Performance Calculations.......................................................................... 41
Total Return................................................................................... 41
Yield.......................................................................................... 42
Comparisons.................................................................................... 42
Financial Statements.............................................................................. 43
Glossary.......................................................................................... 43
Bond Ratings...................................................................................... 44
Moody's Investors Service, Inc................................................................. 44
Standard & Poor's Ratings Services............................................................. 46
Duff & Phelps Credit Rating Co................................................................. 49
Fitch IBCA Ratings............................................................................. 50
Comparative Benchmarks............................................................................ 52
</TABLE>
<PAGE>
Description Of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIOS USE?
- ----------------------------------------------------------------------------
The portfolios currently intend to use the securities and investment
strategies listed below in seeking their objectives; however, they may at
any time invest in any of the investment strategies described in this SAI.
This SAI describes each of these investments/strategies and their risks. A
portfolio may not notify shareholders before employing new strategies,
unless it expects such strategies to become principal strategies. The
investments that are italicized are principal strategies and you can find
more information on these techniques in the prospectus of the portfolio.
You can find more information concerning the limits on the ability of the
portfolios to use these investments in "What Are the Investment Policies of
the Portfolios?"
U.S. Government Portfolio
. Debt securities.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Domestic Equity Portfolio
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
International Equity Portfolio
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
1
<PAGE>
. Options.
. Forward currency exchange contracts.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Small Cap Equity Portfolio
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
- -----------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities,
such as zero-coupon bonds, do not pay current interest and are purchased at
a discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities
include treasury notes, which have initial maturities of one to ten years
and treasury bonds, which have initial maturities of at least ten years and
certain types of mortgage-backed securities that are described under
"Mortgage-Backed Securities" and "Other Asset-Backed Securities." This SAI
discusses mortgage-backed treasury and agency securities in detail in the
section called "Mortgage-Backed Securities" and "Other Asset-Backed
Securities."
The full faith and credit of the U.S. government supports treasury
securities. Unlike treasury securities, the full faith and credit of the
U.S. government generally do not back agency securities. Agency securities
are typically supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
2
<PAGE>
While U.S. government securities are guaranteed as to principal and
interest, their market value is not guaranteed. U.S. government securities
are subject to the same interest rate and credit risks as other fixed
income securities. However, since U.S. government securities are of the
highest quality, the credit risk is minimal. The U.S. government does not
guarantee the net asset value of the assets of a portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or
for capital expenditures such as plant construction, equipment purchases
and expansion. In return for the money loaned to the corporation by
investors, the corporation promises to pay investors interest, and repay
the principal amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble
as securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Since homeowners usually have the option of paying either
part or all of the loan balance before maturity, the effective maturity of
a mortgage-backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure
or guarantee the timely payment of interest and principal of these pools
through various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The adviser
will consider such insurance and guarantees and the creditworthiness of the
issuers thereof in determining whether a mortgage-related security meets
its investment quality standards. It is possible that the private insurers
or guarantors will not meet their obligations under the insurance policies
or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related
securities. GNMA is a wholly owned corporation of the U.S. government and
it falls within the Department of Housing and Urban Development. Securities
issued by GNMA are treasury securities, which means the full faith and
credit of the U.S. government backs them. GNMA guarantees the timely
payment of principal and interest on securities issued by institutions
approved by GNMA and backed by pools of FHA-insured or VA-guaranteed
mortgages. GNMA does not guarantee the market value or yield of mortgage-
backed securities or the value of a portfolio's shares. To buy GNMA
securities, a portfolio may have to pay a premium over the maturity value
of the underlying mortgages, which the portfolio may lose if prepayment
occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered
savings and loan associations, mutual savings banks,
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commercial banks and credit unions and mortgage bankers. Securities issued
by FNMA are agency securities, which means FNMA, but not the U.S.
government, guarantees their timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing.
FHLMC issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by
the full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these
issuers generally offer a higher rate of interest than pools created by
GNMA, FNMA & FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly);
and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing a portfolio to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the
loans underlying a mortgage-backed security sooner than expected. If the
prepayment rates increase, a portfolio may have to reinvest its principal
at a rate of interest that is lower than the rate on existing
mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other
than mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral supporting these securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available
to support payments on these securities. For example, credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which allow debtors to reduce their balances by offsetting certain amounts
owed on the credit cards. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such
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receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Due to the quantity of
vehicles involved and requirements under state laws, asset-backed
securities backed by automobile receivables may not have a proper security
interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure
the receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by
the issuer or sponsor from third parties, for some or all of the assets in
the pool ("credit support"). Delinquency or loss more than that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
A portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of
asset-backed securities depends in part on the characteristics of the
underlying assets, the coupon rates on the securities, prevailing interest
rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay
principal monthly. While whole mortgage loans may collateralize CMOs,
mortgage-backed securities guaranteed by GNMA, FHLMC, or FNMA and their
income streams more typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code of 1986, as amended, and invests in certain mortgages
primarily secured by interests in real property and other permitted
investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired
by its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest
tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its
assets in the short-term securities listed below, U.S. government
securities and investment-grade corporate debt securities. Unless otherwise
specified, a short-term debt security has a maturity of one year or less.
Bank Obligations
A portfolio will only invest in a security issued by a commercial bank if
the bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance
Corporation; and
. is a foreign branch of a U.S. bank and the adviser believes the security
is of an investment quality comparable with other debt securities that
the portfolio may purchase.
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Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term
with the understanding that the depositor can withdraw its money only by
giving notice to the institution. However, there may be early withdrawal
penalties depending upon market conditions and the remaining maturity of
the obligation. A portfolio may only purchase time deposits maturing from
two business days through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a
definite period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial
transaction (to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1
to 270 days issued by banks, corporations and other borrowers. Such
investments are unsecured and usually discounted. A portfolio may invest in
commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured
debt issue rated A or better by Moody's or by S&P. See "Bond Ratings" for a
description of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. Typically, one class will
receive some of the interest and most of the principal, while the other
class will receive most of the interest and the remaining principal. In
extreme cases, one class will receive all of the interest ("interest only"
or "IO" class) while the other class will receive the entire principal
sensitive to the rate of principal payments (including prepayments) on the
underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs.
Slower than anticipated prepayments of principal may adversely affect the
yield to maturity of a PO. The yields and market risk of interest only and
principal only stripped mortgage-backed securities, respectively, may be
more volatile than those of other fixed income securities, including
traditional mortgage-backed securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States
by foreign entities. Investment in these securities involve certain risks
which are not typically associated with investing in domestic securities.
See "FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are
sold at a discount from their face value. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. The amount
of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. The market value
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of zero coupon securities may exhibit greater price volatility than
ordinary debt securities because a stripped security will have a longer
duration than an ordinary debt security with the same maturity. A
portfolio's investments in pay-in-kind, delayed and zero coupon bonds may
require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their
interest payments ("coupons") separated from the underlying principal
("corpus") by their holder, typically a custodian bank or investment
brokerage firm. Once the holder of the security has stripped or separated
corpus and coupons, it may sell each component separately. The principal or
corpus is then sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. Typically, the
coupons are sold separately or grouped with other coupons with like
maturity dates and sold bundled in such form. The underlying treasury
security is held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the
owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on Treasury securities
through the Federal Reserve book-entry record keeping system. Under a
Federal Reserve program known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities," a portfolio can record
its beneficial ownership of the coupon or corpus directly in the book-entry
record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay
the amount it borrowed (principal) from investors. Some debt securities,
however, are callable, meaning the issuer can repay the principal earlier,
on or after specified dates (call dates). Debt securities are most likely
to be called when interest rates are falling because the issuer can
refinance at a lower rate, similar to a homeowner refinancing a mortgage.
The effective maturity of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead,
it calculates its weighted average maturity. This number is an average of
the stated maturity of each debt security held by a portfolio, with the
maturity of each security weighted by the percentage of the assets of the
portfolio it represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes
in interest rates. It measures sensitivity more accurately than maturity
because it takes into account the time value of cash flows generated over
the life of a debt security. Future interest payments and principal
payments are discounted to reflect their present value and then are
multiplied by the number of years they will be received to produce a value
expressed in years -- the duration. Effective duration takes into account
call features and sinking fund prepayments that may shorten the life of a
debt security.
An effective duration of 4 years, for example, would suggest that for each
1% reduction in interest rates at all maturity levels, the price of a
security is estimated to increase by 4%. An increase in rates by the same
magnitude is estimated to reduce the price of the security by 4%. By
knowing the yield and the effective duration of a debt security, one
can
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estimate total return based on an expectation of how much interest rates,
in general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
A portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of a portfolio. If
left unattended, drifts in the average maturity of a portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of a portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security
increases the risk of depreciation due to future increases in market
interest rates. For these reasons, mortgage-backed securities may be less
effective than other types of U.S. government securities as a means of
"locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation
for assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer
higher yields than Treasury securities because their payment of interest
and complete repayment of principal is less certain. The credit rating or
financial condition of an issuer may affect the value of a debt security.
Generally, the lower the quality rating of a security, the greater the
risks that the issuer will fail to pay interest and return principal. To
compensate investors for taking on increased risk, issuers with lower
credit ratings usually offer their investors a higher "risk premium" in the
form of higher interest rates above comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an
adjustment to this "risk premium." Since an issuer's outstanding debt
carries a fixed coupon, adjustments to the risk premium must occur in the
price, which effects the yield to maturity of the bond. If an issuer
defaults or becomes unable to honor its financial obligations, the bond may
lose some or all of its value.
A security rated within the four highest rating categories by a rating
agency is called investment-grade because its issuer is more likely to pay
interest and repay principal than an issuer of a lower rated bond. Adverse
economic conditions or changing circumstances, however, may weaken the
capacity of the issuer to pay interest and repay principal. If a
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security is not rated or is rated under a different system, the adviser may
determine that it is of investment-grade. The adviser may retain securities
that are downgraded, if it believes that keeping those securities is
warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit
worthy and/or highly leveraged (indebted) companies. A corporation may
issue a junk bond because of a corporate restructuring or other similar
event. Compared with investment-grade bonds, junk bonds carry a greater
degree of risk and are less likely to make payments of interest and
principal. Market developments and the financial and business condition of
the corporation issuing these securities influences their price and
liquidity more than changes in interest rates, when compared to investment-
grade debt securities. Insufficient liquidity in the junk bond market may
make it more difficult to dispose of junk bonds and may cause a portfolio
to experience sudden and substantial price declines. A lack of reliable,
objective data or market quotations may make it more difficult to value
junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's
opinion, not an absolute standard of quality, and they do not reflect an
evaluation of market risk. The section "Bond Ratings" contains further
information concerning the ratings of certain rating agencies and their
significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time a portfolio buys it. A
rating agency may change its credit ratings at any time. The adviser
monitors the rating of the security and will take appropriate actions if a
rating agency reduces the security's rating. A portfolio is not obligated
to dispose of securities whose issuers subsequently are in default or which
are downgraded below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner,
to reduce transaction costs or to remain fully invested. They may also
invest in derivatives to protect it from broad fluctuations in market
prices, interest rates or foreign currency exchange rates. Investing in
derivatives for these purposes is known as "hedging." When hedging is
successful, the portfolio will have offset any depreciation in the value of
its portfolio securities by the appreciation in the value of the derivative
position. Although techniques other than the sale and purchase of
derivatives could be used to control the exposure of the portfolio to
market fluctuations, the use of derivatives may be a more effective means
of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party
sells and the other party agrees to buy a specified amount of a financial
instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index,
interest rate, foreign exchange rate or other similar instrument. Agreeing
to buy the underlying financial information is called buying a futures
contract or taking a long position in the contract. Likewise, agreeing to
sell the underlying financial instrument is called selling a futures
contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal
agency.
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These contract markets standardize the terms, including the maturity date
and underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to
pay for or deliver the underlying financial instrument until some future
date (the delivery date). Contract markets require both the purchaser and
seller to deposit "initial margin" with a futures broker, known as a
futures commission merchant, when they enter into the contract. Initial
margin deposits are typically equal to a percentage of the contract's
value. After they open a futures contract, the parties to the transaction
must compare the purchase price of the contract to its daily market value.
If the value of the futures contract changes in such a way that a party's
position declines, that party must make additional "variation margin"
payments so that the margin payment is adequate. On the other hand, the
value of the contract may change in such a way that there is excess margin
on deposit, possibly entitling the party that has a gain to receive all or
a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract calls for the actual
delivery of and payment for the underlying security, in many cases the
parties may close the contract early by taking an opposite position in an
identical contract. If the sale price upon closing out the contract is less
than the original purchase price, the person closing out the contract will
realize a loss. If the sale price upon closing out the contract is more
that the original purchase price, the person closing out the contract will
realize a gain. The opposite is also true. If the purchase price upon
closing out the contract is more than the original sale price, the person
closing out the contract will realize a loss. If the purchase price upon
closing out the contract is less than the original sale price, the person
closing out the contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of
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an increase in the market value of securities it owns or wants to buy. The
portfolio would ordinarily realize a gain if, during the option period, the
value of the underlying instrument exceeded the exercise price plus the
premium paid and related transaction costs. Otherwise, the portfolio would
realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract; or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the
option:
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. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract
(in the case of a put option) at a fixed time and price. Upon exercise of
the option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put
option). If the option is exercised, the parties will be subject to the
futures contracts. In addition, the writer of an option on a futures
contract is subject to initial and variation margin requirements on the
option position. Options on futures contracts are traded on the same
contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e.,
the same exercise price and expiration date) as the option previously
purchased or sold. The difference between the premiums paid and received
represents the trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts
instead of selling or buying futures contracts. The portfolio may buy a put
option on a futures contract for the same reasons it would sell a futures
contract. It also may purchase such put options in order to hedge a long
position in the underlying futures contract. The portfolio may buy call
options on futures contracts for the same purpose as the actual purchase of
the futures contracts, such as in anticipation of favorable market
conditions.
The portfolio may write a call option on a futures contract to hedge
against a decline in the prices of the instrument underlying the futures
contracts. If the price of the futures contract at expiration were below
the exercise price, the portfolio would retain the option premium, which
would offset, in part, any decline in the value of its portfolio
securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if the market price
declines, the portfolio would pay more than the market price for the
underlying instrument. The premium received on the sale of the put option,
less any transaction costs, would reduce the net cost to the portfolio.
Combined Positions
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The portfolio may purchase and write options in combination with each
other, or in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For example, the
portfolio could construct a combined position whose risk and return
characteristics are similar to selling a futures contract by purchasing a
put option and writing a call option on the same underlying instrument.
Alternatively, the portfolio could write a call option at one strike price
and buy a call option at a lower price to reduce the risk of the written
call option in the event of a substantial price increase. Because combined
options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed
to futures contracts which are traded only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in losses if the currency
used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will
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cause the portfolio to assume the risk of fluctuations in the value of the
currency it purchases. Cross hedging transactions also involve the risk of
imperfect correlation between changes in the values of the currencies
involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of
cash flows between two parties on specified dates (settlement dates), where
the cash flows are based on agreed-upon prices, rates, indices, etc. The
nominal amount on which the cash flows are calculated is called the
notional amount. Swaps are individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors, such as interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to
and from the portfolio. If a swap agreement calls for payments by the
portfolio, the portfolio must be prepared to make such payments when due.
In addition, if the counter-party's creditworthiness declined, the value of
a swap agreement would be likely to decline, potentially resulting in
losses.
Generally, swap agreements have a fixed maturity date that will be agreed
upon by the parties. The agreement can be terminated before the maturity
date only under limited circumstances, such as default by one of the
parties or insolvency, among others, and can be transferred by a party only
with the prior written consent of the other party. The portfolio may be
able to eliminate its exposure under a swap agreement either by assignment
or by other disposition, or by entering into an offsetting swap agreement
with the same party or a similarly creditworthy party. If the counter-party
is unable to meet its obligations under the contract, declares bankruptcy,
defaults or becomes insolvent, the portfolio may not be able to recover the
money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements
according to guidelines established by the SEC. If the portfolio enters
into a swap agreement on a net basis, it will segregate assets with a daily
value at least equal to the excess, if any, of the portfolio's accrued
obligations under the swap agreement over the accrued amount the portfolio
is entitled to receive under the agreement. If the portfolio enters into a
swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the portfolio's accrued obligations under
the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in
return for a specified interest rate. By entering into an equity index
swap, for example, the index receiver can gain exposure to stocks making up
the index of securities without actually purchasing those stocks. Equity
index swaps involve not only the risk associated with investment in the
securities represented in the index, but also the risk that the performance
of such securities, including dividends, will not exceed the return on the
interest rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of
interest rate cash flow on specified dates in the future. Some of the
different types of interest rate swaps are "fixed-for floating rate swaps,"
"termed basis swaps" and "index amortizing swaps." Fixed-for floating rate
swap involve the exchange of fixed interest rate cash flows for floating
rate cash flows. Termed basis swaps entail cash flows to both parties based
on floating interest rates, where the interest rate indices are different.
Index amortizing swaps are typically fixed-for floating swaps where the
notional amount changes if certain conditions are met.
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Like a traditional investment in a debt security, a portfolio could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the portfolio enters into a swap where it agrees
to exchange a floating rate of interest for a fixed rate of interest, the
portfolio may have to pay more money than it receives. Similarly, if the
portfolio enters into a swap where it agrees to exchange a fixed rate of
interest for a floating rate of interest, the portfolio may receive less
money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in
which one party agrees to make interest rate payments in one currency and
the other promises to make interest rate payments in another currency. A
portfolio may enter into a currency swap when it has one currency and
desires a different currency. Typically the interest rates that determine
the currency swap payments are fixed, although occasionally one or both
parties may pay a floating rate of interest. Unlike an interest rate swap,
however, the principal amounts are exchanged at the beginning of the
contract and returned at the end of the contract. Changes in foreign
exchange rates and changes in interest rates, as described above may
negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level. The seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these
transactions themselves entail certain other risks. For example,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance of the portfolio
than if it had not entered into any derivatives transactions. Derivatives
may magnify the portfolio's gains or losses, causing it to make or lose
substantially more than it invested.
When used for hedging purposes, increases in the value of the securities
the portfolio holds or intends to acquire should offset any losses incurred
with a derivative. Purchasing derivatives for purposes other than hedging
could expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends
on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant securities. In
the case of poor correlation, the price of the securities the portfolio is
hedging may not move in the same amount, or even in the same direction as
the hedging instrument. The adviser will try to minimize this risk by
investing only in those contracts whose behavior it expects to resemble the
portfolio securities it is trying to hedge. However, if the portfolio's
prediction of interest and currency rates, market value, volatility or
other economic factors is incorrect, the portfolio may lose money, or may
not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence:
. current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract;
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. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an instrument
stops; and
. differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the participation
of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based
on a broad market index. Since narrower indices are made up of a smaller
number of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration
in the issuer's creditworthiness. Because the value of the portfolio's
foreign-denominated investments changes in response to many factors other
than exchange rates, it may not be possible to match the amount of currency
options and futures to the value of the portfolio's investments precisely
over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio
can terminate it only by entering into a closing purchase or sale
transaction. Moreover, a portfolio may close out a futures contract only on
the exchange the contract was initially traded. Although a portfolio
intends to purchase options and futures only where there appears to be an
active market, there is no guarantee that such a liquid market will exist.
If there is no secondary market for the contract, or the market is
illiquid, the portfolio may not be able to close out its position. In an
illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time
and price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
. investors may lose interest in a particular derivative or category of
derivatives.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can
change during a single trading day. Daily trading limits establish the
maximum amount that the price of a derivative may vary from the settlement
price of that derivative at the end of trading on the previous day. Once
the price of a derivative reaches this value, a portfolio may not trade
that derivative at a price beyond that limit. The daily limit governs only
price movements during a given day and does not limit potential gains or
losses. Derivative prices have occasionally moved to the daily limit for
several consecutive trading days, preventing prompt liquidation of the
derivative.
Because of the low margin deposits required upon the opening of a
derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative
may result in an immediate and substantial loss (as well as gain) to the
portfolio and it may lose more than it originally invested in the
derivative.
If the price of a futures contract changes adversely, the portfolio may
have to sell securities at a time when it is disadvantageous to do so to
meet its minimum daily margin requirement. The portfolio may lose its
margin deposits if a broker-dealer with whom it has an open futures
contract or related option becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other respects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on
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corporate matters. Types of preferred stocks include adjustable-rate
preferred stock, fixed dividend preferred stock, perpetual preferred stock,
and sinking fund preferred stock. Generally, the market values of preferred
stock with a fixed dividend rate and no conversion element varies inversely
with interest rates and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits
of owning a company, such investors must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to
the company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the over-the-
counter market and might not be traded in volumes typical of securities
traded on a national securities exchange. Thus, the securities of small and
medium capitalization companies are likely to be less liquid, and subject
to more abrupt or erratic market movements, than securities of larger, more
established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities. EDRs are
similar to ADRs, except that they are typically issued by European Banks or
trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank
for Reconstruction and Development (World Bank) and the International
Finance Corporation would consider to be an emerging or developing country.
Typically,
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emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. Investments in these investment funds are subject
to the provisions of the 1940 Act. Shareholders of a UAM Fund that invests
in such investment funds will bear not only their proportionate share of
the expenses of the UAM Fund (including operating expenses and the fees of
the adviser), but also will bear indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may trade
at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect an investment
in foreign securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt;
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective economies.
Actions by these governments could significantly influence the market
prices of securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and
economic conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other
countries or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit the portfolio's ability to invest
in a particular country or make it very expensive for the portfolio to
invest in that country. Some countries require prior governmental
approval, limit the types or amount of securities or companies in which a
foreigner can invest. Other countries may restrict the ability of foreign
investors to repatriate their investment income and capital gains.
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Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
applicable to United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and
erratic price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of securities denominated in that currency. Some of the factors that
may impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and their
exchange rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in response
to other market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
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. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to
recover a portion of these taxes, the portion that cannot be recovered will
reduce the income the portfolio receives from its investments. The
portfolio does not expect such foreign withholding taxes to have a
significant impact on performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries;
and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain separate currencies in any
form. Until then, however, each country and issuers within each country are
free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that adopt the Euro in all aspects of the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than
Euro?
22
<PAGE>
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
- -----------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by a portfolio. Like other shareholders, each
portfolio would pay its proportionate share of those fees. Consequently,
shareholders of a portfolio would pay not only the management fees of the
portfolio, but also the management fees of the investment company in which
the portfolio invests. A portfolio may invest up to 10% of its total assets
in the securities of other investment companies, but may not invest more
than 5% of its total assets in the securities of any one investment company
or acquire more than 3% of the outstanding securities of any one investment
company.
The SEC has granted an order that allows a portfolio to invest the greater
of 5% of its total assets or $2.5 million in the UAM DSI Money Market
Portfolio, provided that the investment is:
. For cash management purposes;
. Consistent with a portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
- ------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolios normally use repurchase agreements to
earn income on assets that are not invested.
When a portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, a portfolio's right to sell
the security may be restricted. In addition, the value of the security
might decline before a portfolio can sell it and a portfolio might incur
expenses in enforcing its rights.
RESTRICTED SECURITIES
- -----------------------------------------------------------------------------
The portfolios may purchase restricted securities that are not registered
for sale to the general public but which are eligible for resale to
qualified institutional investors under Rule 144A of the Securities Act of
1933. Under the supervision of the Board, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided
that a dealer or institutional trading market in such securities exists,
these restricted securities are not treated as illiquid securities for
purposes of the portfolio's investment limitations. The price realized from
the sales of these securities could be more or less than those originally
paid by a portfolio or less than what may be considered the fair value of
such securities.
23
<PAGE>
SECURITIES LENDING
- ------------------------------------------------------------------------------
A portfolio may lend a portion of its total assets to broker- dealers or
other financial institutions. It may then reinvest the collateral it
receives in short-term securities and money market funds. When a portfolio
lends its securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value
of the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit
issued by a domestic U.S. bank or securities issued or guaranteed by the
U. S. government;
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements.
When the portfolio lends securities, there is a risk that the borrower will
become financially unable to honor its contractual obligations. If this
happens, the portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- -----------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, a portfolio contracts to purchase securities for a fixed price
at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities a portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. A portfolio will only enter into
these types of transactions with the intention of actually acquiring the
securities, but may sell them before the settlement date.
A portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When a portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, a
portfolio may miss the opportunity to obtain the security at a favorable
price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because a portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
A portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. A portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
24
<PAGE>
Investment Policies of the Portfolios
A portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, a
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
FUNDAMENTAL POLICIES
- ------------------------------------------------------------------------------
The following investment limitations are fundamental, which means a
portfolio cannot change them without approval by the vote of a majority of
the outstanding voting securities of the portfolio, as defined by the 1940
Act.
Each of the portfolios will not:
. With respect to 50% of its assets (75% for the McKee Small Cap Equity
Portfolio), invest more than 5% of its total assets at the time of
purchase in securities of any single issuer (other than obligations
issued or guaranteed as to principal and interest by the government of
the U.S. or any agency or instrumentality thereof).
. With respect to 50% of its assets (75% for the McKee Small Cap Equity
Portfolio), purchase more than 10% of any class of the outstanding voting
securities of any issuer.
. Borrow money, except (1) from banks and as a temporary measure for
extraordinary or emergency purposes and then, in no event, in excess of
33 1/3 % of the portfolio's gross assets valued at the lower of market or
cost.
. Invest for the purpose of exercising control over management of any
company.
. Invest in physical commodities or contracts on physical commodities.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments
issued or guaranteed by the U.S. government and its agencies when the
portfolio adopts a temporary defensive position.
. Invest more than an aggregate of 15% of the assets of the portfolio,
determined at the time of investment, in securities subject to legal or
contractual restrictions on resale or securities for which there are no
readily available markets.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1) making
any permitted borrowings, mortgages or pledges, or (2) entering
repurchase transactions.
. Make loans except by purchasing debt securities in accordance with its
investment objective and policies, or entering into repurchase
agreements, or by lending its portfolio securities to banks, brokers,
dealers and other financial institutions so long as such loans are made
in compliance with the 1940 Act and the rules and regulations or
interpretations of the SEC.
. Purchase on margin or sell short.
. Purchase or retain securities of an issuer if those officers and board
members or its investment adviser owning more than 1/2 1/2 of 1% of such
securities together own more than 5% of such securities.
. Purchase or sell real estate or real estate limited partnerships,
although it may purchase or sell securities of companies which deal in
real estate and may purchase and sell securities which are secured by
interests in real estate.
. Underwrite the securities of other issuers.
. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
25
<PAGE>
NON-FUNDAMENTAL POLICIES
- -----------------------------------------------------------------------------
The following limitations are non-fundamental, which means a portfolio may
change them without shareholder approval.
The portfolios will not:
. Invest in stock or bond futures and/or options on futures unless not more
than 5% of the portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts.
. Invest more than 5% of its assets at the time of purchase in the
securities of companies that have (with predecessors) a continuous
operating history of less than 3 years.
. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 33 1/3% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total assets.
Management of the Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to
execute policies the board has formulated. The Fund pays each board member
who is not also an officer or affiliated person (independent board member)
a $150 quarterly retainer fee per active portfolio and a $2,000 meeting
fee. In addition, the Fund reimburses each independent board member for
travel and other expenses incurred while attending board meetings. The
$2,000 meeting fee and expense reimbursements are aggregated for all of the
board members and allocated proportionately among the portfolios of the UAM
Funds Complex. The Fund does not pay board members that are affiliated with
the fund for their services as board members. UAM, its affiliates or SEI
pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act.
Mr. English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in
the UAM Funds Complex. However, the Fund does not believe that the
relationship is a material business relationship, and, therefore, does not
consider him to be an "interested person" of the Fund. If these
circumstances change, the Board will determine whether any action is
required to change the composition of the Board.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation From
Compensation From the Fund Complex
Position Principal Occupations During the Past 5 the Fund as of as of October 31,
Name, Address, DOB with Fund years October 31, 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management $7,137 $10,625
College Road-- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company, Inc.; President of Bennett
1/26/29 Management Company from 1988 to 1993.
------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund $7,137 $10,625
1250 24/th/ St., NW Member since January 1999; Vice President for
Washington, DC 20037 Finance and Administration and Treasurer
8/14/51 of Radcliffe College from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation From
Compensation From the Fund Complex
Position Principal Occupations During the Past 5 the Fund as of as of October 31,
Name, Address, DOB with Fund years October 31, 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William A. Humenuk Board Executive Vice President and Chief $7,137 $10,625
100 King Street West Member Administrative Officer of Philip Services
P.O. Box 2440, LCD-1 Corp.; Formerly, a Partner in the
Hamilton Ontario, Philadelphia office of the law firm
Canada L8N-4J6 Dechert Price & Rhoads and a Director of
4/21/42 Hofler Corp.
- ------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of $7,137 $10,625
16 West Madison Street Member Broventure Company, Inc.; Chairman of the
Baltimore, MD 21201 Board of Chektec Corporation and Cyber
8/5/48 Scientific, Inc.
- ------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, 0 0
211 Congress Street Member Inc. since March 1999; Vice President UAM
Boston, MA 02110 Trust Company since January 1996;
2/24/53 Principal of UAM Fund Distributors, Inc.
since December 1995; Vice President of
UAM Investment Services, Inc. from
January 1996 to March 1999 and a Director
and Chief Operating Officer of CS First
Boston Investment Management from
1993-1995.
- ------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a 0 0
One International Place Member; Director of United Asset Management
Boston, MA 02110 President Corporation; Director, Partner or Trustee
3/21/35 and of each of the Investment Companies of
Chairman the Eaton Vance Group of Mutual Funds.
- ------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of 0 0
One Financial Center Member Dewey Square Investors Corporation since
Boston, MA 02111 1988; Director and Chief Executive
7/1/43 Officer of H.T. Investors, Inc., formerly
a subsidiary of Dewey Square.
- ------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief 0 0
One International Place President Financial Officer of United Asset
Boston, MA 02110 Management Corporation.
9/19/47
- ------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer 0 0
211 Congress Street of the Fidelity Group of Mutual Funds
Boston, MA 02110 from 1991 to 1995; held various other
7/4/51 offices with Fidelity Investments from
November 1990 to March 1995.
- ------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase
Boston, MA 02110 Global Fund Services Company from 1995 to
9/18/63 1996; Senior Manager of Deloitte & Touche
LLP from 1985 to 1995,
- ------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI 0 0
SEI Investments Treasurer Investments; Senior Manager at Arthur
One Freedom Valley Rd. Andersen prior to 1994.
Oaks, PA 19456
12/17/63
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of
record or beneficially 5% or more of the shares of a portfolio:
27
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Shares Owned Portfolio Class
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wesbanco Bank Wheeling 21.33% McKee Domestic Institutional
Agnt City of Wheeling Municipal Employees Retirement & Equity Portfolio Class Shares
Benefit Fund
U/A 1/10/89
1 Bank Plaza
Wheeling, WV 26003-3565
- ------------------------------------------------------------------------------------------------------------------------
Carey & CO 10.41% McKee Domestic Institutional
PO Box 1558 Equity Portfolio Class Shares
Columbus, OH 43260-0002
- ------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co 9.30% McKee Domestic Institutional
FBO Iron Workers Local 549 Security Plan Equity Portfolio Class Shares
c/o Mutual Funds
PO Box 8971
Wilmington, DE 19899-8971
- ------------------------------------------------------------------------------------------------------------------------
One Valley Bank NA CUST 8.07% McKee Domestic Institutional
FBO Morgantown Utility Equity Portfolio Class Shares
Attn: Security Cage
Mail Street 1510
PO Box 1793
Charleston, WV 25326-1793
- ------------------------------------------------------------------------------------------------------------------------
Strafe & CO 7.30% McKee Domestic Institutional
Ironworkers Med AC Equity Portfolio Class Shares
PO Box 160
Westervivlle, OH 43086-0160
- ------------------------------------------------------------------------------------------------------------------------
Saxon & CO 6.36% McKee Domestic Institutional
Borough of Canonsburg Equity Portfolio Class Shares
68 E. Pike Street
Canonsburg, PA 15317-1312
- ------------------------------------------------------------------------------------------------------------------------
City of Sr. Mary's Police Pension Fund 5.16% McKee Domestic Institutional
808 S. Michael Road Equity Portfolio Class Shares
P.O. Box 1994
Saint Marys, PA 15857-5994
- ------------------------------------------------------------------------------------------------------------------------
Saxon & CO 17.27% McKee International Institutional
FBO Westmoreland County Employees Retirement Fund Equity Portfolio Class Shares
PO Box 7780
Philadelphia, PA 19182-0001
- ------------------------------------------------------------------------------------------------------------------------
MAC & CO 15.37% McKee International Institutional
A/C MIDF 8346BN2 Equity Portfolio Class Shares
Mutual Funds Operations
PO Box 3198
Pittsburgh, PA 15230-3198
- ------------------------------------------------------------------------------------------------------------------------
Fulvest & CO 9.22% McKee International Institutional
FBO Lancaster County Era Equity Portfolio Class Shares
PO Box 3215
Lancaster, PA 17604-3215
- ------------------------------------------------------------------------------------------------------------------------
AllFirst Trust CO NA 8.72% McKee International Institutional
FBO County of Dauphin Retirement Plan Equity Portfolio Class Shares
Security Processing 109-911
PO Box 1596
Baltimore, MD 21203-1596
- ------------------------------------------------------------------------------------------------------------------------
Saxon & Co. 6.71% McKee International Institutional
FBO Cumberland County City Employees Retirement CUST Equity Portfolio Class Shares
PO Box 7780-1888
Philadelphia, PA 19182-0001
- ------------------------------------------------------------------------------------------------------------------------
Saxon & CO 5.38% McKee International Institutional
FBO Butler City Retirement Equity Portfolio Class Shares
PO Box 7780-1888
Philadelphia, PA 19182-0001
- ------------------------------------------------------------------------------------------------------------------------
Keystone Financial Inc. 5.32% McKee International Institutional
C/O Keystone Financial Trust OPS Equity Portfolio Class Shares
P.O. Box 2450
Altoona, PA 16608-2450
- ------------------------------------------------------------------------------------------------------------------------
Light & CO 20.81% McKee Small Cap Institutional
c/o AllFirst Trust CO NA Equity Portfolio Class Shares
Security Processing 109-911
PO Box 1596
Baltimore, MD 21203-1596
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Shares Owned Portfolio Class
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MAC & CO 11.46% McKee Small Cap Institutional
A/C MIDF 52561W2 Equity Portfolio Class
Mutual Funds Operations Shares
PO Box 3198
Pittsburgh, PA 15230-3198
- ---------------------------------------------------------------------------------------------------------------------------
MAC & CO 8.64% McKee Small Cap Institutional
A/C MIDF 8346BN2 Equity Portfolio Class
Mutual Funds Operations Shares
PO Box 3198
Pittsburgh, PA 15230-3198
- ---------------------------------------------------------------------------------------------------------------------------
Strafe & CO 7.13% McKee Small Cap Institutional
FBO Ironworkers A/C 9388396001 Equity Portfolio Class
PO Box 160 Shares
Westerville, OH 43086-0160
- ---------------------------------------------------------------------------------------------------------------------------
Saxon & Co. 5.94% McKee Small Cap Institutional
FBO Cumberland County City Employees Retirement CUST Equity Portfolio Class
PO Box 7780-1888 Shares
Philadelphia, PA 19182-0001
- ---------------------------------------------------------------------------------------------------------------------------
First Union National Bank 5.30% McKee Small Cap Institutional
FBO Lackawanna City Employees Retirement Fund Equity Portfolio Class
1525 West WT Harris Blvd CMG NC 1151 Shares
Charlotte, NC 28288-8522
- ---------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co 34.45% McKee U.S. Institutional
FBO Iron Workers Local 549 Security Plan Government Class
c/o Mutual Funds Portfolio Shares
PO Box 8971
Wilmington, DE 19899-8971
- ---------------------------------------------------------------------------------------------------------------------------
City of St. Mary's Police Pension Fund 8.85% McKee U.S. Institutional
808 S. Michael Road Government Class
PO Box 1994 Portfolio Shares
Saint Mary's, PA 15857-5994
- ---------------------------------------------------------------------------------------------------------------------------
Saxon & CO 8.17% McKee U.S. Institutional
Borough of Canonsburg Government Class
68 E. Pike Street Portfolio Shares
Canonsburg, PA 15317-1312
- ---------------------------------------------------------------------------------------------------------------------------
Teamsters Local 211 Reserve Account 7.43% McKee U.S. Institutional
625 Stanwix Street 1903 Government Class
Pittsburgh, PA 15222-1406 Portfolio Shares
- ---------------------------------------------------------------------------------------------------------------------------
Greene County Employees Retirement Fund 6.19% McKee U.S. Institutional
New County Office Bldg. Government Class
93 East High Street Portfolio Shares
Waynesburg, PA 15370-1839
- ---------------------------------------------------------------------------------------------------------------------------
Econony Borough Employees Fund 5.57% McKee U.S. Institutional
c/o Controllers Office Government Class
2856 Conway Wallrose Road Portfolio Shares
Baden, PA 15005-2306
- ---------------------------------------------------------------------------------------------------------------------------
Zoar Home 5.43% McKee U.S. Institutional
801 Union Avenue Government Class
Pittsburgh, PA 15212-5523 Portfolio Shares
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio. As of
February 1, 2000, the directors and officers of the Fund owned less than 1%
of the outstanding shares of the portfolios.
29
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
- --------------------------------------------------------------------------------
C.S. McKee & Co., Inc., a Pennsylvania corporation located at One Gateway
Center, Pittsburgh, PA 15222, is the investment adviser to each of the
portfolios. The adviser manages and supervises the investment of each
portfolio's assets on a discretionary basis. The adviser, an affiliate of
United Asset Management Corporation, has provided investment management
services to pension and profit sharing plans, trusts and endowments, 401(k)
and thrift plans, corporations and other institutions and individuals since
1931.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds Complex.
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Fund has filed each agreement with the SEC as part
of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of a portfolio's assets;
. Continuously reviews, supervises and administers the investment program
of a portfolio; and
. Determines what portion of a portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Investment Advisory Agreement, (2) reckless disregard by the
adviser of its obligations and duties under the Investment Advisory
Agreement, or (3) a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services, the adviser shall not
be subject to any liability whatsoever to the Fund, for any error of
judgment, mistake of law or any other act or omission in the course of, or
connected with, rendering services under the Investment Advisory Agreement.
30
<PAGE>
Continuing an Investment Advisory Agreement
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Board Members or (b) a majority of the
shareholders of the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority
of Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the
Fund.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
Advisory Fees
For its services, each portfolio pays its adviser the following annual
fees, which are expressed as a percentage of the average daily net assets
of the portfolio. Due to the effect of fee waivers by the adviser, the
actual percentage of average net assets that a portfolio pays in any given
year may be different from the rate set forth in its contract with the
adviser. For the last three fiscal years, the portfolios paid the following
in management fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Paid
----------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Portfolio
1999 $ 104,458
----------------------------------------------------------------------------------------------------------------------
1998 $ 188,898
----------------------------------------------------------------------------------------------------------------------
1997 $ 180,278
----------------------------------------------------------------------------------------------------------------------
Domestic Equity Portfolio
1999 $ 302,499
----------------------------------------------------------------------------------------------------------------------
1998 $ 418,475
----------------------------------------------------------------------------------------------------------------------
1997 $ 589,228
----------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
1999 $1,051,174
----------------------------------------------------------------------------------------------------------------------
1998 $ 857,075
----------------------------------------------------------------------------------------------------------------------
1997 $ 738,184
----------------------------------------------------------------------------------------------------------------------
Small Cap Equity Portfolio
1999 $ 824,282
----------------------------------------------------------------------------------------------------------------------
1998 $ 675,734
----------------------------------------------------------------------------------------------------------------------
1997 N/A
</TABLE>
<PAGE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is
not obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services. UAMFDI, an affiliate of UAM, is located at
211 Congress Street, Boston, Massachusetts 02110.
SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------
UAM and each of its affiliates, may, at its own expense, compensate a
Service Agent or other person for marketing, shareholder servicing,
record-keeping and/or other services performed with respect to the Fund or
the portfolio. The person making such payments may do so out of its
revenues, its profits or any other source available to it. Such services
arrangements, when in effect, are made generally available to all qualified
service providers. The adviser may also compensate its affiliated companies
for referring investors to the portfolio.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend
disbursing and transfer agent services for the Fund. UAMFSI, an affiliate
of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
32
<PAGE>
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if
the Board specifically approves such continuance every year. The Board or
UAMFSI may terminate the Fund Administration Agreement, without penalty, on
not less than ninety (90) days' written notice. The Fund Administration
Agreement automatically terminates upon its assignment by UAMFSI without
the prior written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in
performing its duties under the Fund Administration Agreement. Such people
may be officers and employees who are employed by both UAMFSI and the Fund.
UAMFSI will pay such people for such employment. The Fund will not incur
any obligations with respect to such people.
Administration and Transfer Agency Services Fees
Each portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, a portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at
the following rates:
<TABLE>
<CAPTION>
Annual Rate
--------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Portfolio 0.043%
--------------------------------------------------------------------------------------------------------------
Domestic Equity Portfolio 0.043%
--------------------------------------------------------------------------------------------------------------
International Equity Portfolio 0.063%
--------------------------------------------------------------------------------------------------------------
Small Cap Equity Portfolio 0.043%
</TABLE>
2. Each portfolio also pays a fee to UAMFSI for sub-administration and
other services provided by SEI. The fee, which UAMFSI pays to SEI, is
calculated at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM
Funds Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its
services as transfer agent and dividend-disbursing agent equal to
$10,500 for the first operational class and $10,500 for each additional
class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational
class and $2,500 for each additional class.
For the last three fiscal years the portfolios paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Portfolio
1999 $18,087 $61,618 $79,705
---------------------------------------------------------------------------------------------------------------------
1998 $102,948 $83,328 $186,276
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C>
1997 $99,215 $83,206 $182,421
---------------------------------------------------------------------------------------------------------------------
Domestic Equity Portfolio
1999 $27,987 $70,883 $98,870
---------------------------------------------------------------------------------------------------------------------
1998 $112,236 $83,629 $195,865
---------------------------------------------------------------------------------------------------------------------
1997 $127,984 $91,727 $219,711
---------------------------------------------------------------------------------------------------------------------
International Equity
Portfolio
1999 $104,039 $109,597 $213,636
---------------------------------------------------------------------------------------------------------------------
1998 $198,575 $120,940 $319,515
---------------------------------------------------------------------------------------------------------------------
1997 $178,372 $115,116 $293,488
---------------------------------------------------------------------------------------------------------------------
Small Cap Equity
Portfolio
1999 $43,277 $71,221 $114,498
---------------------------------------------------------------------------------------------------------------------
1998 $93,068 $63,571 $156,639
---------------------------------------------------------------------------------------------------------------------
1997 N/A $188,977 N/A
</TABLE>
Custodian
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York
11245, provides for the custody of the Fund's assets pursuant to the terms
of a custodian agreement with the Fund.
Independent Accountants
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Selection of Brokers
- --------------------------------------------------------------------------------
Each Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect
to all transactions for the portfolio. The adviser may select brokers based
on research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and
not instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes
it is reasonable to do so in light of the value of the research,
statistical, and pricing services provided by the broker effecting the
transaction.
It is not the practice of the Fund to allocate brokerage or effect
principal transactions with dealers based on sales of shares that a
broker-dealer firm makes. However, the Fund may place trades with qualified
broker-dealers who recommend the Fund or who act as agents in the purchase
of Fund shares for their clients.
Simultaneous Transactions
- --------------------------------------------------------------------------------
The adviser makes investment decisions for each portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the
same security for more than one client. The adviser strives to allocate
such transactions among its clients, including the portfolios, in a fair
and reasonable manner. Although there is no
34
<PAGE>
specified formula for allocating such transactions, the Fund's governing
board periodically reviews the various allocation methods used by the
adviser.
Brokerage Commissions
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect
a dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When a portfolio executes
transactions in the over-the-counter market, it will deal with primary
market makers unless prices that are more favorable are otherwise
obtainable.
Commissions Paid
For the last three fiscal years, the portfolios paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
-------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government Portfolio
1999 $ 0
-------------------------------------------------------------------------------------------------------------------------
1998 $12,459
-------------------------------------------------------------------------------------------------------------------------
1997 $ 0
-------------------------------------------------------------------------------------------------------------------------
Domestic Equity Portfolio
1999 $110,547
-------------------------------------------------------------------------------------------------------------------------
1998 $174,853
-------------------------------------------------------------------------------------------------------------------------
1997 $172,158
-------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
1999 $339,129
-------------------------------------------------------------------------------------------------------------------------
1998 $211,763
-------------------------------------------------------------------------------------------------------------------------
1997 $199,969
-------------------------------------------------------------------------------------------------------------------------
Small Cap Equity Portfolio
1999 $212,727
-------------------------------------------------------------------------------------------------------------------------
1998 $188,977
-------------------------------------------------------------------------------------------------------------------------
1997 N/A
</TABLE>
CAPITAL STOCK AND OTHER SECURITIES
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its
name to "UAM Funds, Inc." The Fund's principal executive office is located
at 211 Congress Street, Boston, MA
35
<PAGE>
02110; however, shareholders should direct all correspondence to the
address listed on the cover of this SAI. The Fund is an open-end management
company.
Description Of Shares And Voting Rights
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing
board to issue three billion shares of common stock, with a $.001 par
value. The governing board has the power to create and designate one or
more series (portfolios) or classes of shares of common stock and to
classify or reclassify any unissued shares at any time and without
shareholder approval. When issued and paid for, the shares of each series
and class of the Fund are fully paid and nonassessable, and have no
pre-emptive rights or preference as to conversion, exchange, dividends,
retirement or other features.
The shares of each series and class have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of members of the governing board can elect all of the members if
they choose to do so. On each matter submitted to a vote of the
shareholders, a shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing
in his name on the books of the Fund. Shares of all classes will vote
together as a single class except when otherwise required by law or as
determined by the members of the Fund's governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. The liquidation of any
portfolio or class thereof may be authorized at any time by vote of a
majority of the members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are
identical in all respects. Unlike Institutional and Adviser Class Shares,
Institutional Service Class Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures. The Adviser Class Shares impose a sales load on
purchases. The classes also have different exchange privileges. The net
income attributable to Institutional Service Class Shares and the dividends
payable on Institutional Service Class Shares will be reduced by the amount
of the shareholder servicing and distribution fees; accordingly, the net
asset value of the Institutional Service Class Shares will be reduced by
such amount to the extent a portfolio has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
36
<PAGE>
FEDERAL TAXES
Each portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income
to shareholders each year so that the portfolio itself generally will be
relieved of federal income and excise taxes. If a portfolio were to fail to
so qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would
be taxed as if they received ordinary dividends, although corporate
shareholders could be eligible for the dividends received deduction.
A portfolios' dividends that are paid to their corporate shareholders and
are attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
NET ASSET VALUE PER SHARE
- ----------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to
the NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result
by the total number of shares outstanding. For purposes of this
calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on
the NYSE every day the NYSE is open for trading. The NYSE usually closes at
4:00 p.m. The NYSE is closed on the following days: New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
37
<PAGE>
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
Purchase of Shares
- ------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the Fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "How the Fund Values it Assets"
at the next determination of net asset value after acceptance. The Fund
will issue shares of the portfolio at the NAV of the portfolio determined
as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and
that there are no restrictions on their resale imposed by the 1933 Act
or otherwise;
. All dividends, interest, subscription, or other rights pertaining to
such securities become the property of the portfolio and are delivered
to the fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all
securities of the same issuer held by the portfolio cannot exceed 5% of
the net assets of the portfolio. This condition does not apply to U.S.
government securities.
38
<PAGE>
Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such
exchanges should contact the adviser.
Redemption of Shares
- ------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you
paid for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of
shares or dollar amount the shareholder wishes to redeem signed by all
registered owners of the shares in the exact names in which they are
registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and
other organizations.
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to
receive redemption proceeds. To change an account in this manner, you
must submit a written request signed by each shareholder, with each
signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable
for any losses if they fail to do so. These procedures include requiring
the investor to provide certain personal identification at the time an
account is opened and before effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions of such transaction requests. The Fund or UAMSSC may be liable
for any losses due to unauthorized or fraudulent telephone instructions if
the Fund or the UAMSSC does not employ the procedures described above.
Neither the Fund nor the UAMSSC will be responsible for any loss,
liability, cost or expense for following instructions received by telephone
that it reasonably believes to be genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment
of redemptions.
39
<PAGE>
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid
in whole or in part, in investment securities or in cash, as the Board may
deem advisable; however, payment will be made wholly in cash unless the
governing board believes that economic or market conditions exist which
would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be
valued as set forth under "Valuation of Shares." A redeeming shareholder
would normally incur brokerage expenses if these securities were converted
to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will
pay your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of
the Commission as a result of which it is not reasonably practicable
for the portfolio to dispose of securities owned by it, or to fairly
determine the value of its assets; or
. for such other periods as the Commission may permit.
40
<PAGE>
Exchange Privilege
- ------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
Transfer Of Shares
- ------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. The performance is calculated separately
for each portfolio.
Total Return
- ------------------------------------------------------------------------------
Total return is the change in value of an investment in a portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a
stated period. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period.
The fund calculates the average annual total return of a portfolio by
finding the average annual compounded rates of return over one, five and
ten-year periods that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each one, five and ten-
year period and the deduction of all applicable Fund expenses on an annual
basis. Since Institutional Service Class Shares bear additional service and
distribution expenses, their average annual total return will generally be
lower than that of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
41
<PAGE>
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the
end of the 1, 5 or 10 year periods (or fractional portion
thereof).
Set forth in the table below are the portfolios' average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from a
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of
10 Years or 30-Day
One Year Five Years Since Inception Yield Inception Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Portfolio 2.44% N/A 5.56% 5.46% 03/02/95
- ---------------------------------------------------------------------------------------------------------------------
Domestic Equity Portfolio 13.76% N/A 17.40% N/A 12/31/98
- ---------------------------------------------------------------------------------------------------------------------
International Equity Portfolio 30.33% 10.83% 10.77% N/A 12/31/99
- ---------------------------------------------------------------------------------------------------------------------
Small Cap Equity Portfolio 0.81% N/A 7.66% N/A 11/04/97
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Yield
- ------------------------------------------------------------------------------
Yield refers to the income generated by an investment in a portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds.
As this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during
the base period. Since Institutional Service Class shares bear additional
service and distribution expenses, their yield will generally be lower than
that of the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)6-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
Comparisons
- ------------------------------------------------------------------------------
A portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data
reported in financial and industry publications, and various indices as
further described in this SAI. This information may also be included in
sales literature and advertising.
To help investors better evaluate how an investment in a portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various
financial
42
<PAGE>
publications. Advertisements may also compare performance (as calculated
above) to performance as reported by other investments, indices and
averages. Please see "Comparative Benchmarks" for publications, indices and
averages that may be used.
In assessing such comparisons of performance, an investor should keep in
mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in a
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by a portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that a portfolio will continue this
performance as compared to such other averages.
FINANCIAL STATEMENTS
The following documents are included in the portfolios' October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
GLOSSARY
All terms that this SAI does not otherwise define, have the same meaning
in the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser to each portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-
administrator.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
43
<PAGE>
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds
Inc. II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-
shareholder servicing agent.
BOND RATINGS
Moody's Investors Service, Inc.
- ------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well-
maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and
asset protection are, nevertheless, expected to be maintained at
adequate levels .
baa An issue that which is rated "baa" is considered to be a medium--
grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of
eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each
minus (-) rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating
catefory; the modifier 2 indicates a mid-range ranking and
the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as
well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals)
Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition
are rated conditionally. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals
that begin when facilities are completed, or (d) payments
to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of
condition.
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Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics:
. Leading market positions in well-established
industries.
. Conservative capitalization structure with
moderate reliance on debt and ample asset
protection.
. Broad margins in earnings coverage of fixed
financial charges and high internal cash
generation.
. Well-established access to a range of financial
markets and assured sources of alternate
liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have
an acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the
level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's Ratings Services
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
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2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior
obligations are typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy, as noted above. Accordingly,
in the case of junior debt, the rating may not conform exactly with the
category definition.
AAA An obligation rated 'AAA' has the highest rating assigned
by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very
strong.
A An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated 'BB', 'B', 'CCC' , 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment
than other speculative issues. However, it faces major
ongoing uncertainties or exposures to adverse business,
financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment
than obligations rated 'BB', but the obligor currently has
the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the
obligation.
CCC An obligation rated 'CCC' is currently vulnerable to
non-payment, and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its
financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated 'C'
is CURENTLY HIGHLY VULNERABLE to non-payment. The 'C'
rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but
payments on this obligation are being continued. A 'C' will
also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently
paying.
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D An obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are
not made on the date due even if the applicable grace
period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period.
The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include:
obligation linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk
- such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest
terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that
there is insufficient information on which to base a
rating, or that Standard & Poor's does not rate a
particular obligation as a matter of policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to
meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The
'D' rating category is used when payments on an obligation
are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors'' believes
that such payments will be made during such grace period.
The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment
is a key factor in this analysis. An obligor's capacity to repay foreign
currency obligations may
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<PAGE>
be lower than its capacity to repay obligations in its local currency due
to the sovereign government's own relatively lower capacity to repay
external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign
currency issuer ratings are also distinguished from local currency issuer
ratings to identity those instances where sovereign risks make them
different for the same issuer.
Duff & Phelps Credit Rating Co.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of
economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic
stress.
BBB+/BBB Below-average protection factors but still considered sufficient
BBB- for prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors
fluctuate according to industry conditions. Overall quality
may move up or down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation
will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection
factors. Risk factors are very small.
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Good Grade
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a
high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA Ratings
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case
of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote a low expectation
of credit risk. The capacity for timely payment of
financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a
possibility of credit risk developing, particularly as the
result of adverse economic change over time; however,
business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in
this category are not investment grade.
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<PAGE>
B Highly speculative. `B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A
`CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD,DD,D
Default. The ratings of obligations in this category are
based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and
cannot be estimated with any precision, the following serve
as general guidelines. "DDD" obligations have the highest
potential for recovery, around 90%-100% of outstanding
amounts and accrued interest. "D" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or
all of their obligations. Entities rated "DDD" have the highest
prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated
"DD" and "D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while
entities rated "D" have a poor prospect for repaying all
obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for
timely payment of financial commitments; may have an added
"+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term
adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' long-term
rating category, to categories below `CCC', or to short-term ratings other
than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade,
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"Negative", for a potential downgrade, or "Evolving", if ratings may be
raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
COMPARATIVE BENCHMARKS
(alphabetically)
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time in
the price of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market
fund yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on
the New York Stock Exchange. It has been a widely followed indicator of the
stock market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New
York Times, Personal Investor, The Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund performance
over specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market
capitalization-weighted index maintained by the International Finance
Corporation. This index consists of over 890 companies in 26 emerging
equity markets, and is designed to measure more precisely the returns
portfolio managers might receive from investment in emerging markets equity
securities by focusing on companies and markets that are legally and
practically accessible to foreign investors.
Lehman Brothers Indices:
-----------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market
value-weighted index that combines the Lehman Government/Corporate Index
and the Lehman Mortgage-Backed Securities Index, and includes treasury
issues, agency issues, corporate bond issues and mortgage backed
securities. It includes fixed rate issuers of investment grade (BBB) or
higher, with maturities of at least one year and outstanding par values of
at least $100 million for U.S. government issues and $25 million for
others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate
debt. Also included are yankee bonds, which are dollar-denominated SEC
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registered public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued debt
of U.S. government agencies and quasi-federal corporations, and corporate debt
guaranteed by the U.S. government). In addition to the aggregate index, sub-
indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of at
least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded during the
month is held in the index until month end and then removed. All returns are
market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar denominated,
noncovertible, have at least one year remaining to maturity and an outstanding
par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers Government
Bond Index (intermediate-term sub-index) and four corporate bond sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
- -------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with 12
indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual fund
classification method in which peer comparisons are based upon characteristics
of the specific stocks in the underlying funds, rather than upon a broader
investment objective stated in a prospectus. Certain of Lipper, Inc.'s
classifications for general equity funds' investment objectives were changed
while other equity objectives remain unchanged. Changing investment objectives
include Capital Appreciation Funds, Growth Funds, Mid-Cap Funds, Small-Cap
Funds, Micro-Cap Funds, Growth & Income Funds, and Equity Income Funds.
Unchanged investment objectives include Sector Equity Funds, World Equity Funds,
Mixed Equity Funds, and certain other funds including all Fixed Income Funds and
S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group; 2)
number of component funds remains the same (30); 3) component funds are defined
annually; 4) can be linked historically; and 5) are used as a benchmark for fund
performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but are
not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt issues
(BBB or higher) with dollar-weighted average maturities of one to five years or
less. (Taxable Fixed-Income category)
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Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which seek
relatively high current income and growth of income through investing 60% or
more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds prospectus or
portfolio practice invest primarily in companies with market capitalizations
less than $1 billion at the time of purchase. (Equity category)
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to grow
significantly faster than the earnings of the stocks represented in the major
unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestments of all distributions, exclusive of any
applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities from
1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market
value-weighted averages of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price, yield,
risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices --capitalization-weighted
unmanaged indices of all industrial, utilities, transportation and finance
stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
- ---------------------------
Russell 3000(R)Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of the
1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000 Index.
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Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000 Index.
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell Top
200 companies with higher price-to-book ratios and higher forecasted growth
values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell Top
200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are representative
of a diversified, investment grade portfolio of contracts issued by credit
worthy insurance companies. The index is unmanaged and does not reflect any
transaction costs. Direct investment in the index is not possible.
Standard & Poor's U.S. Indices:
- ------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10 economic
sectors aggregated from 23 industry groups, 59 industries, and 123 sub-
industries covering almost 6,000 companies globally. The new classification
standard will be used with all of their
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respective indices. Features of the new classification include 10 economic
sectors, rather than the 11 S&P currently uses. Sector and industry gradations
are less severe. Rather than jumping from 11 sectors to 115 industries under the
former S&P system, the new system progresses from 10 sectors through 23 industry
groups, 50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market performance.
It is used by 97% of U.S. money managers and pension plan sponsors. More than $1
trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market size,
liquidity, and industry group representation. It is a market-value weighted
index with each stock affecting the index in proportion to its market value. It
is used by over 95% of U.S. managers and pension plan sponsors. More than $25
billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The index
is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred benchmark
for both active and passive management due to its low turnover and greater
liquidity. Approximately $8 billion is indexed to the S&P SmallCap 600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted index
is made up of 100 major, blue chip stocks across diverse industry groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the securities
in the S&P 500 Index according to price-to-book ratio. The Value index contains
the companies with the lower price-to-book ratios; while the companies with the
higher price-to-book ratios are contained in the Growth index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80% of
the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the largest
utility companies listed on the New York Stock Exchange, including 23 electric
power companies, 12 natural gas distributors and 8 telephone companies.
Standard & Poor's CANADA Indices:
- --------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size segment
of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
- --------------------------------
S&P Global 1200 Index - aims to provide investors with an investable portfolio.
This index, which covers 29 countries and consists of seven regional components,
offers global investors an easily accessible, tradable set of stocks and
particularly suits the new generation of index products, such as exchange-traded
funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as the
new Canadian large cap benchmark and will ultimately replace the Toronto 35 and
the TSE 100.
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S&P/TOPIX 150 - includes 150 highly liquid securities selected from each major
sector of the Tokyo market. It is designed specifically to give portfolio
managers and derivative traders an index that is broad enough to provide
representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries--
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan -- are
represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad enough
to provide representation of the market, but narrow enough to ensure
liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization) of
the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all treasury
bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return equivalent
yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small company
stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value
Line Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used by
the institutional investment community as a broad measure of the performance of
public real estate equity for asset allocation and performance comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the Wilshire
Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
NWQ Special Equity Portfolio
Institutional Class Shares
Institutional Service Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectuses of the portfolios dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address listed
above.
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
<S> <C>
Description of Permitted Investments.................. 1
What Investment Strategies May the Portfolio Use?.... 1
Debt Securities...................................... 1
Derivatives.......................................... 8
Equity Securities.................................... 16
Foreign Securities................................... 18
Investment Companies................................. 21
Repurchase Agreements................................ 22
Restricted Securities................................ 22
Securities Lending................................... 22
When Issued Transactions............................. 23
Investment Policies of the Portfolio.................. 23
Fundamental Policies................................. 24
Non-Fundamental Policies............................. 24
Management Of The Fund................................ 25
Principal Shareholders................................ 26
Investment Advisory and Other Services................ 27
Investment Adviser................................... 27
Distributor.......................................... 29
Service And Distribution Plans....................... 29
Administrative Services.............................. 32
Custodian............................................ 33
Independent Accountants.............................. 33
Brokerage Allocation and Other Practices.............. 33
Selection of Brokers................................. 33
Simultaneous Transactions............................ 34
Brokerage Commissions................................ 34
Capital Stock and Other Securities.................... 35
Description Of Shares And Voting Rights.............. 35
Purchase, Redemption and Pricing of Shares............ 36
Net Asset Value Per Share............................ 36
Purchase of Shares................................... 37
Redemption of Shares................................. 38
Exchange Privilege................................... 40
Transfer Of Shares................................... 40
Performance Calculations.............................. 40
Total Return......................................... 40
Yield................................................ 41
Comparisons.......................................... 42
Financial Statements.................................. 42
Glossary.............................................. 42
Bond Ratings.......................................... 43
Moody's Investors Service, Inc....................... 43
Standard & Poor's Ratings Services................... 46
Duff & Phelps Credit Rating Co....................... 48
Fitch IBCA Ratings................................... 49
Comparative Benchmarks................................ 51
</TABLE>
<PAGE>
Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio currently intends to use the securities and investment
strategies listed below in seeking its objectives; however, it may at any time
invest in any of the investment strategies described in this SAI. This SAI
describes each of these investments/strategies and their risks. The portfolio
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. The investments that are
italicized are principal strategies and you can find more information on these
techniques in the prospectus of the portfolio. You can find more information
concerning the limits on the ability of the portfolio to use these investments
in "What Are the Investment Strategies of the Portfolio?"
. Foreign securities.
. Equity securities.
. Debt securities.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
- --------------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return and
repayment of the amount borrowed at maturity. Some debt securities, such as
zero-coupon bonds, do not pay current interest and are purchased at a discount
from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities include
treasury notes, which have initial maturities of one to ten years and treasury
bonds, which have initial maturities of at least ten years and certain types
of mortgage-backed securities that are described under "Mortgage-Backed
Securities" and "Other Asset-Backed Securities." This SAI discusses mortgage-
backed treasury and agency securities in detail in the section called
"Mortgage-Backed Securities" and "Other Asset-Backed Securities."
The full faith and credit of the U.S. government supports treasury securities.
Unlike treasury securities, the full faith and credit of the U.S. government
generally do not back agency securities. Agency securities are typically
supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
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. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the
credit risk is minimal. The U.S. government does not guarantee the net asset
value of the assets of the portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors, the
corporation promises to pay investors interest, and repay the principal amount
of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part or
all of the loan balance before maturity, the effective maturity of a mortgage-
backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The adviser will consider
such insurance and guarantees and the creditworthiness of the issuers thereof
in determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or guarantors will
not meet their obligations under the insurance policies or guarantee
arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of portfolio
shares. To buy GNMA securities, the portfolio may have to pay a premium over
the maturity value of the underlying mortgages, which the portfolio may lose
if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks,
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<PAGE>
commercial banks and credit unions and mortgage bankers. Securities issued by
FNMA are agency securities, which means FNMA, but not the U.S. government,
guarantees their timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970 to
increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to guaranteeing
the mortgage-related security, such issuers may service and/or have originated
the underlying mortgage loans. Pools created by these issuers generally offer
a higher rate of interest than pools created by GNMA, FNMA & FHLMC because
they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing the portfolio to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, the portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which allow debtors
to reduce their balances by offsetting certain amounts owed on the credit
cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such
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<PAGE>
receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Due to the quantity of vehicles involved and
requirements under state laws, asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
The portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of asset-backed
securities depends in part on the characteristics of the underlying assets,
the coupon rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying
assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, the portfolio may invest a portion of its assets
in the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a
short-term debt security has a maturity of one year or less.
Bank Obligations
The portfolio will only invest in a security issued by a commercial bank if
the bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
4
<PAGE>
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
The portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. The portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See "Bond Ratings" for a description
of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. Typically, one class will receive
some of the interest and most of the principal, while the other class will
receive most of the interest and the remaining principal. In extreme cases,
one class will receive all of the interest ("interest only" or "IO" class)
while the other class will receive the entire principal sensitive to the rate
of principal payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments may
adversely affect the yield to maturity of IOs. Slower than anticipated
prepayments of principal may adversely affect the yield to maturity of a PO.
The yields and market risk of interest only and principal only stripped
mortgage-backed securities, respectively, may be more volatile than those of
other fixed income securities, including traditional mortgage-backed
securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See
"FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold
at a discount from their face value. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. The amount of the
discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security
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<PAGE>
will have a longer duration than an ordinary debt security with the same
maturity. The portfolio's investments in pay-in-kind, delayed and zero coupon
bonds may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once
the holder of the security has stripped or separated corpus and coupons, it
may sell each component separately. The principal or corpus is then sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold bundled in such
form. The underlying treasury security is held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder thereof), in
trust on behalf of the owners thereof. Purchasers of stripped obligations
acquire, in effect, discount obligations that are economically identical to
the zero coupon securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," the portfolio can record its beneficial ownership of the coupon
or corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
The portfolio that invests in debt securities has no real maturity. Instead,
it calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by the portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or the portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years --
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
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Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation for
assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and complete
repayment of principal is less certain. The credit rating or financial
condition of an issuer may affect the value of a debt security. Generally,
the lower the quality rating of a security, the greater the risks that the
issuer will fail to pay interest and return principal. To compensate investors
for taking on increased risk, issuers with lower credit ratings usually offer
their investors a higher "risk premium" in the form of higher interest rates
above comparable Treasuries securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an adjustment
to this "risk premium." Since an issuer's outstanding debt carries a fixed
coupon, adjustments to the risk premium must occur in the price, which effects
the yield to maturity of the bond. If an issuer defaults or becomes unable to
honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
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Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause the portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolio currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's opinion,
not an absolute standard of quality, and they do not reflect an evaluation of
market risk. The section "Bond Ratings" contains further information
concerning the ratings of certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time the portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. The portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner, to
reduce transaction costs or to remain fully invested. They may also invest in
derivatives to protect it from broad fluctuations in market prices, interest
rates or foreign currency exchange rates. Investing in derivatives for these
purposes is known as "hedging." When hedging is successful, the portfolio will
have offset any depreciation in the value of its portfolio securities by the
appreciation in the value of the derivative position. Although techniques
other than the sale and purchase of derivatives could be used to control the
exposure of the portfolio to market fluctuations, the use of derivatives may
be a more effective means of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party sells
and the other party agrees to buy a specified amount of a financial instrument
at an agreed upon price and time. The financial instrument underlying the
contract may be a stock, stock index, bond, bond index, interest rate, foreign
exchange rate or other similar instrument. Agreeing to buy the underlying
financial information is called buying a futures contract or taking a long
position in the contract. Likewise, agreeing to sell the underlying financial
instrument is called selling a futures contract or taking a short position in
the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit
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"initial margin" with a futures broker, known as a futures commission
merchant, when they enter into the contract. Initial margin deposits are
typically equal to a percentage of the contract's value. After they open a
futures contract, the parties to the transaction must compare the purchase
price of the contract to its daily market value. If the value of the futures
contract changes in such a way that a party's position declines, that party
must make additional "variation margin" payments so that the margin payment is
adequate. On the other hand, the value of the contract may change in such a
way that there is excess margin on deposit, possibly entitling the party that
has a gain to receive all or a portion of this amount. This process is known
as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the sale price upon closing out the contract is less than the
original purchase price, the person closing out the contract will realize a
loss. If the sale price upon closing out the contract is more that the
original purchase price, the person closing out the contract will realize a
gain. The opposite is also true. If the purchase price upon closing out the
contract is more than the original sale price, the person closing out the
contract will realize a loss. If the purchase price upon closing out the
contract is less than the original sale price, the person closing out the
contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the exercise price
plus the premium paid and related transaction costs. Otherwise, the portfolio
would realize either no gain or a loss on the purchase of the call option.
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The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower price.
If security prices fall, the portfolio may lose an amount of money equal to
the difference between the value of the security and the premium it received.
Writing covered put options may deprive the portfolio of the opportunity to
profit from a decrease in the market price of the securities it would like to
acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price;
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. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option).
If the option is exercised, the parties will be subject to the futures
contracts. In addition, the writer of an option on a futures contract is
subject to initial and variation margin requirements on the option position.
Options on futures contracts are traded on the same contract market as the
underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead
of selling or buying futures contracts. The portfolio may buy a put option on
a futures contract for the same reasons it would sell a futures contract. It
also may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures
contracts, such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the portfolio would retain the option premium, which would offset, in part,
any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if the market price declines, the
portfolio would pay more than the market price for the underlying instrument.
The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of a
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substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded only on exchanges regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely,
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the portfolio may have to sell on the spot market some of the foreign currency
it received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing rates,
security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the portfolio,
the portfolio must be prepared to make such payments when due. In addition, if
the counter-party's creditworthiness declined, the value of a swap agreement
would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the
prior written consent of the other party. The portfolio may be able to
eliminate its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counter-party is unable to
meet its obligations under the contract, declares bankruptcy, defaults or
becomes insolvent, the portfolio may not be able to recover the money it
expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the SEC. If the portfolio enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the portfolio's accrued obligations under the
swap agreement over the accrued amount the portfolio is entitled to receive
under the agreement. If the portfolio enters into a swap agreement on other
than a net basis, it will segregate assets with a value equal to the full
amount of the portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of interest
rate cash flow on specified dates in the future. Some of the different types
of interest rate swaps are "fixed-for floating rate swaps," "termed basis
swaps" and "index amortizing swaps." Fixed-for floating rate swap involve the
exchange of fixed interest rate cash flows for floating rate cash flows.
Termed basis swaps entail cash flows to both parties based on floating
interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the portfolio enters into a swap where it agrees to exchange a
floating rate of interest for a fixed rate of interest, the portfolio may have
to pay more money than it receives. Similarly, if the portfolio enters into a
swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the portfolio may receive less money than it has agreed to pay.
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Currency Swaps -- A currency swap is an agreement between two parties in which
one party agrees to make interest rate payments in one currency and the other
promises to make interest rate payments in another currency. A portfolio may
enter into a currency swap when it has one currency and desires a different
currency. Typically the interest rates that determine the currency swap
payments are fixed, although occasionally one or both parties may pay a
floating rate of interest. Unlike an interest rate swap, however, the
principal amounts are exchanged at the beginning of the contract and returned
at the end of the contract. Changes in foreign exchange rates and changes in
interest rates, as described above may negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the portfolio than if it had not entered into
any derivatives transactions. Derivatives may magnify the portfolio's gains
or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities the portfolio is hedging may not move
in the same amount, or even in the same direction as the hedging instrument.
The adviser will try to minimize this risk by investing only in those
contracts whose behavior it expects to resemble the portfolio securities it is
trying to hedge. However, if the portfolio's prediction of interest and
currency rates, market value, volatility or other economic factors is
incorrect, the portfolio may lose money, or may not make as much money as it
expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
. current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
. differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
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Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on
a broad market index. Since narrower indices are made up of a smaller number
of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration in
the issuer's creditworthiness. Because the value of the portfolio's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the portfolio's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange
the contract was initially traded. Although a portfolio intends to purchase
options and futures only where there appears to be an active market, there is
no guarantee that such a liquid market will exist. If there is no secondary
market for the contract, or the market is illiquid, the portfolio may not be
able to close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage firm
or clearing house or other occurrences may disrupt normal trading activity;
or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
15
<PAGE>
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, a portfolio may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative prices have
occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
- --------------------------------------------------------------------------------
Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
16
<PAGE>
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give
the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price that
is usually higher than the market price at the time the warrant is issued.
Corporations often issue warrants to make the accompanying debt security more
attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of
their small or medium size, limited markets and financial resources, narrow
product lines and frequent lack of management depth. The securities of small
and medium companies are often traded in the over-the-counter market and might
not be traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and
17
<PAGE>
medium capitalization companies are likely to be less liquid, and subject to
more abrupt or erratic market movements, than securities of larger, more
established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
- --------------------------------------------------------------------------------
Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities. EDRs are similar to ADRs, except that they are
typically issued by European Banks or trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. Investments in these investment funds
18
<PAGE>
are subject to the provisions of the 1940 Act. Shareholders of a UAM Fund that
invests in such investment funds will bear not only their proportionate share
of the expenses of the UAM Fund (including operating expenses and the fees of
the adviser), but also will bear indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may trade at
a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in foreign
securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and
economic conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit the portfolio's ability to invest in a particular country or
make it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and
19
<PAGE>
sophistication, are generally not as developed as the markets in the United
States. Foreign stocks markets tend to differ from those in the United States
in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the
United States dollar will result in a corresponding change in value of
securities denominated in that currency. Some of the factors that may impair
the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover
a portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
20
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that adopt the Euro
in all aspects of the investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custody and accounting. Some of the
uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
The portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by the portfolio. Like other shareholders, the portfolio
would pay its proportionate share of those fees. Consequently, shareholders
of the portfolio would pay not only the management fees of the portfolio, but
also the management fees of the investment company in which the
21
<PAGE>
portfolio invests. The portfolio may invest up to 10% of its total assets in
the securities of other investment companies, but may not invest more than 5%
of its total assets in the securities of any one investment company or acquire
more than 3% of the outstanding securities of any one investment company.
The SEC has granted an order that allows the portfolio to invest the greater
of 5% of its total assets or $2.5 million in the UAM DSI Money Market
Portfolio, provided that the investment is:
. For cash management purposes;
. Consistent with the portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The portfolio will bear expenses of the UAM DSI Money Market Portfolio on the
same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolio normally uses repurchase agreements to earn
income on assets that are not invested.
When the portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before the portfolio can sell it and the portfolio might incur
expenses in enforcing its rights.
RESTRICTED SECURITIES
- --------------------------------------------------------------------------------
The portfolio may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the
portfolio or less than what may be considered the fair value of such
securities.
SECURITIES LENDING
- --------------------------------------------------------------------------------
The portfolio may lend a portion of its total assets to broker- dealers or
other financial institutions. It may then reinvest the collateral it receives
in short-term securities and money market funds. When the portfolio lends its
securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U. S.
government;
22
<PAGE>
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction,
the portfolio contracts to purchase securities for a fixed price at a future
date beyond customary settlement time. "Delayed delivery" refers to
securities transactions on the secondary market where settlement occurs in the
future. In each of these transactions, the parties fix the payment obligation
and the interest rate that they will receive on the securities at the time the
parties enter the commitment; however, they do not pay money or deliver
securities until a later date. Typically, no income accrues on securities the
portfolio has committed to purchase before the securities are delivered,
although the portfolio may earn income on securities it has in a segregated
account. The portfolio will only enter into these types of transactions with
the intention of actually acquiring the securities, but may sell them before
the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolio
The portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, the
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
23
<PAGE>
FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following investment limitations are fundamental, which means the
portfolio cannot change them without approval by the vote of a majority of the
outstanding voting securities of the portfolio, as defined by the 1940 Act.
The portfolio will not:
The portfolio will not:
. with respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the U.S.
government or any agency or instrumentality thereof).
. with respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. borrow, except (1) from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3% of the
portfolio's gross assets valued at the lower of market or cost.
. invest for the purpose of exercising control over management of any
company.
. invest in physical commodities or contracts on physical commodities.
. invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
. invest more than an aggregate of 15% of the net assets of the portfolio,
determined at the time of investment, in securities subject to legal or
contractual restrictions on resale or securities for which there are no
readily available markets.
. issue senior securities, as defined in the Investment Company Act of 1940,
as amended, except that this restriction shall not be deemed to prohibit a
portfolio from (1) making any permitted borrowings, mortgages or pledges,
or (2) entering repurchase transactions.
. make loans except by purchasing debt securities in accordance with its
investment objective and policies, or entering into repurchase agreements,
or by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as the loans are made in compliance with the
Investment Company Act of 1940, as amended, and the rules and regulations
or interpretations of the SEC.
. purchase on margin or sell short.
. purchase or retain securities of an issuer if those officers and board
members or its investment adviser owning more than 1/2 1/2 of 1% of such
securities together own more than 5% of such securities.
. purchase or sell real estate or real estate limited partnerships, although
it may purchase and sell securities of companies which deal in real estate
and may purchase and sell securities which are secured by interests in real
estate.
. underwrite the securities of other issuers.
. write or acquire options or interests in oil, gas, mineral leases or other
mineral exploration or development programs.
NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the portfolio may
change them without shareholder approval. The portfolio will not:
The portfolio will not:
24
<PAGE>
. invest in stock or bond futures and/or options on futures unless (1) not
more than 5% of the portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts
provided; and (2) not more than 20% of the portfolio's assets are invested
in stock or bond futures and options on futures.
. invest more than 5% of its assets at the time of Purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. invest more than 15% of the portfolio's assets in securities rated less
than BBB by S&P or Baa by Moody's (junk bonds).
. invest more than 35% of the portfolio's assets in foreign securities or
American Depositary Receipts.
. pledge, mortgage, or hypothecate any of its assets to an extent greater
than 33 1/3% of its total assets at fair market value.
. purchase additional securities when borrowings exceed 5% of total assets.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to execute
policies the board has formulated. The Fund pays each board member who is not
also an officer or affiliated person (independent board member) a $150
quarterly retainer fee per active portfolio and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and
other expenses incurred while attending board meetings. The $2,000 meeting
fee and expense reimbursements are aggregated for all of the board members and
allocated proportionately among the portfolios of the UAM Funds Complex. The
Fund does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from the
UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act. Mr.
English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in the
UAM Funds Complex. However, the Fund does not believe that the relationship
is a material business relationship, and, therefore, does not consider him to
be an "interested person" of the Fund. If these circumstances change, the
Board will determine whether any action is required to change the composition
of the Board.
<TABLE>
<CAPTION>
Position
Name, Address, DOB with Fund Principal Occupations During the Past 5 years
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
John T. Bennett, Jr. Board Member President of Squam Investment Management Company,
College Road -- RFD 3 Inc. and Great Island Investment Company, Inc.;
Meredith, NH 03253 President of Bennett Management Company from 1988 to
1/26/29 1993.
- -------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Member Financial Officer of World Wildlife Fund since
1250 24/th/ St., NW January 1999; Vice President for Finance and
Washington, DC 20037 Administration and Treasurer of Radcliffe College
8/14/51 from 1991 to 1999.
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Aggregate Compensation Aggregate Compensation
From the Fund as of From the Fund Complex as
Name, Address, DOB October 31, 1999 of October 31, 1999
- -------------------------------------------------------------------------------------
<S> <C> <C>
John T. Bennett, Jr. $7,137 $10,625
College Road -- RFD 3
Meredith, NH 03253
1/26/29
- -------------------------------------------------------------------------------------
Nancy J. Dunn $7,137 $10,625
1250 24/th/ St., NW
Washington, DC 20037
8/14/51
- -------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Position
Name, Address, DOB with Fund Principal Occupations During the Past 5 years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William A. Humenuk Board Member Executive Vice President and Chief Administrative
100 King Street West Officer of Philip Services Corp.; Formerly, a Partner
P.O. Box 2440, LCD-1 in the Philadelphia office of the law firm Dechert
Hamilton Ontario, Price & Rhoads and a Director of Hofler Corp.
Canada L8N-4J6
4/21/42
- --------------------------------------------------------------------------------------------------------------------
Philip D. English Board Member President and Chief Executive Officer of Broventure
16 West Madison Street Company, Inc.; Chairman of the Board of Chektec
Baltimore, MD 21201 Corporation and Cyber Scientific, Inc.
8/5/48
- --------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board Member President of UAM Investment Services, Inc. since
211 Congress Street March 1999; Vice President UAM Trust Company since
Boston, MA 02110 January 1996; Principal of UAM Fund Distributors,
2/24/53 Inc. since December 1995; Vice President of UAM
Investment Services, Inc. from January 1996 to March
1999 and a Director and Chief Operating Officer of CS
First Boston Investment Management from 1993-1995.
- --------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director of
One International Place Member; United Asset Management Corporation; Director,
Boston, MA 02110 President Partner or Trustee of each of the Investment
3/21/35 and Chairman Companies of the Eaton Vance Group of Mutual Funds.
- --------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board Member President and Chief Investment Officer of Dewey
One Financial Center Square Investors Corporation since 1988; Director and
Boston, MA 02111 Chief Executive Officer of H.T. Investors, Inc.,
7/1/43 formerly a subsidiary of Dewey Square.
- --------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial Officer
One International Place President of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- --------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of the
211 Congress Street Fidelity Group of Mutual Funds from 1991 to 1995;
Boston, MA 02110 held various other offices with Fidelity Investments
7/4/51 from November 1990 to March 1995.
- --------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund
211 Congress Street Treasurer Administration and Compliance of Chase Global Fund
Boston, MA 02110 Services Company from 1995 to 1996; Senior Manager of
9/18/63 Deloitte & Touche LLP from 1985 to 1995,
- --------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI Investments;
SEI Investments Treasurer Senior Manager at Arthur Andersen prior to 1994.
One Freedom Valley Rd.
Oaks, PA 19456
12/17/63
<CAPTION>
Aggregate Compensation Aggregate Compensation
From the Fund as of From the Fund Complex as
Name, Address, DOB October 31, 1999 of October 31, 1999
- ----------------------------------------------------------------------------------------
<S> <C> <C>
William A. Humenuk $7,137 $10,625
100 King Street West
P.O. Box 2440, LCD-1
Hamilton Ontario,
Canada L8N-4J6
4/21/42
- ----------------------------------------------------------------------------------------
Philip D. English $7,137 $10,625
16 West Madison Street
Baltimore, MD 21201
8/5/48
- ----------------------------------------------------------------------------------------
James P. Pappas* 0 0
211 Congress Street
Boston, MA 02110
2/24/53
- ----------------------------------------------------------------------------------------
Norton H. Reamer* 0 0
One International Place
Boston, MA 02110
3/21/35
- ----------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* 0 0
One Financial Center
Boston, MA 02111
7/1/43
- ----------------------------------------------------------------------------------------
William H. Park 0 0
One International Place
Boston, MA 02110
9/19/47
- ----------------------------------------------------------------------------------------
Gary L. French 0 0
211 Congress Street
Boston, MA 02110
7/4/51
- ----------------------------------------------------------------------------------------
Robert R. Flaherty 0 0
211 Congress Street
Boston, MA 02110
9/18/63
- ----------------------------------------------------------------------------------------
Robert J. DellaCroce 0 0
SEI Investments
One Freedom Valley Rd.
Oaks, PA 19456
12/17/63
</TABLE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
26
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Shares Owned Portfolio Class
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Engineers Joint Pension Fund 66.89% NWQ Special Equity Institutional
PO Box 100 Portfolio Class Shares
Syracuse, NY 13205-0100
- -----------------------------------------------------------------------------------------------------------------------------
Wilmington Trust CO TR 10.87% NWQ Special Equity Institutional
U/A 4/01/1998 FBO IBT 401K Portfolio Class Shares
Profit Sharing Plan c/o Mutual Funds UAM
PO Box 8971
Wilmington, DE 19899-8971
- -----------------------------------------------------------------------------------------------------------------------------
Charles Schwab & CO INC 6.46% NWQ Special Equity Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104-4122
- -----------------------------------------------------------------------------------------------------------------------------
Carpenters Local 700 Def Ben efit Retirement Fund 6.19% NWQ Special Equity Institutional
G. David Weaver, James N. Niver, James Dineen & Keith E. Shroyer ,TTEES Portfolio Class Shares
21 Main Street
Addison, NY 14801-1209
- -----------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co 60.80% NWQ Special Equity Institutional
FBO Mustang Employees 401K PSP Portfolio Service Class
c/o Mutual Funds Shares
PO Box 8971
Wilmington, DE 19899-8971
- -----------------------------------------------------------------------------------------------------------------------------
Linn Family Partnership 21.88% NWQ Special Equity Institutional
95 Broad cove Drive Portfolio Service Class
Montgomery, TX 77356-8311 Shares
- -----------------------------------------------------------------------------------------------------------------------------
CIBC World Markets Corp 14.73% NWQ Special Equity Institutional
FBO 0333-83066-16 Portfolio Service Class
PO Box 3484 Shares
Church Street Station
New York, NY 10008-3484
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolio.
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
NWQ Investment Management Company, Inc., a California corporation located at
2049 Century Park East, 4th Floor, Los Angeles, California 90067, is the
investment adviser for the portfolio. The adviser manages and supervises the
investment of the portfolio's assets on a discretionary basis. The adviser, an
affiliate of United Asset Management Corporation, has provided investment
management services to institutional and high net worth individuals since
1982.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name,
27
<PAGE>
with their own leadership and individual investment philosophy and approach.
Each UAM Affiliated Firm manages its own business independently on a day-to-
day basis. Investment strategies employed and securities selected by UAM
Affiliated Firms are separately chosen by each of them. Several UAM Affiliated
Firms also act as investment advisers to separate series or portfolios of the
UAM Funds Complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of the Investment
Advisory Agreement. The Fund has filed the Investment Advisory Agreement with
the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
The adviser:
. Manages the investment and reinvestment of the portfolio's assets;
. Continuously reviews, supervises and administers the investment program of
the portfolio; and
. Determines what portion of the portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Investment Advisory Agreement, (2) reckless disregard by the adviser of
its obligations and duties under the Investment Advisory Agreement, or (3) a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
The Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
28
<PAGE>
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the portfolio pays its adviser a fee equal to of the
average daily net assets of the portfolio. Due to the effect of fee waivers by
the adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For the last three fiscal years, the portfolio
paid the following in management fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Investment Advisory Fees Total Investment Advisory
Paid Waived Fees
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NWQ Special Equity Portfolio
1999 $185,627 $104,737 $80,890
- -------------------------------------------------------------------------------------------------------------------------------
1998 $ 0 $ 72,915 $ 0
- -------------------------------------------------------------------------------------------------------------------------------
1997 $ 18,699 $ 0 $18,699
</TABLE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services, and any amounts it may receive under a Service
and Distribution Plan are passed through in their entirety to third parties.
UAMFDI, an affiliate of UAM, is located at 211 Congress Street, Boston,
Massachusetts 02110.
SERVICE AND DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan (the
"Plans") for the portfolio's Institutional Service Class Shares pursuant to
Rule 12b-1 under the 1940 Act.
Shareholder Servicing Plan
The Shareholder Servicing Plan (Service Plan) permits the Fund to compensate
broker-dealers or other financial institutions (Service Agents) that have
agreed with UAMFDI to provide administrative support services to Institutional
Service Class shareholders that are their customers. Under the Service Plan,
Institutional Service Class Shares may pay service fees at the maximum annual
rate of 0.25 of the average daily net asset value of such shares held by the
Service Agent for the benefit of its customers. The Fund pays these fees out
of the assets allocable to the portfolio's Institutional Service Class Shares
to UAMFDI, to the Service Agent directly or through UAMFDI. Each item for
which a payment may be made under the Service Plan constitutes personal
service and/or shareholder account maintenance and may constitute an expense
of distributing Institutional Service Class Shares as the SEC construes such
term under Rule 12b-1. Services for which Institutional Service Class Shares
may compensate Service Agents include:
. Acting as the sole shareholder of record and nominee for beneficial owners.
. Maintaining account records for such beneficial owners of the Fund's
shares.
. Opening and closing accounts.
29
<PAGE>
. Answering questions and handling correspondence from shareholders about
their accounts.
. Processing shareholder orders to purchase, redeem and exchange shares.
. Handling the transmission of funds representing the purchase price or
redemption proceeds.
. Issuing confirmations for transactions in the Fund's shares by
shareholders.
. Distributing current copies of prospectuses, statements of additional
information and shareholder reports.
. Assisting customers in completing application forms, selecting dividend and
other account options and opening any necessary custody accounts.
. Providing account maintenance and accounting support for all transactions.
. Performing such additional shareholder services as may be agreed upon by
the Fund and the Service Agent, provided that any such additional
shareholder services must constitute a permissible non-banking activity in
accordance with the then current regulations of, and interpretations
thereof by, the Board of Governors of the Federal Reserve System, if
applicable.
Rule 12b-1 Distribution Plan
The Distribution Plan permits the portfolio to pay UAMFDI or others for
certain distribution, promotional and related expenses involved in marketing
its Institutional Service Class Shares. Under the Distribution Plan,
Institutional Service Class Shares may pay distribution fees at the maximum
annual rate of 0.75% of the average daily net asset value of such shares held
by the Service Agent for the benefit of its customers. These expenses
include, among other things:
. Advertising the availability of services and products.
. Designing materials to send to customers and developing methods of making
such materials accessible to customers.
. Providing information about the product needs of customers.
. Providing facilities to solicit Fund sales and to answer questions from
prospective and existing investors about the Fund.
. Receiving and answering correspondence from prospective investors,
including requests for sales literature, prospectuses and statements of
additional information.
. Displaying and making available sales literature and prospectuses.
. Acting as liaison between shareholders and the Fund, including obtaining
information from the Fund and providing performance and other information
about the Fund.
In addition, the Institutional Service Class Shares may make payments directly
to other unaffiliated parties, who either aid in the distribution of their
shares or provide services to the Class.
Fees Paid under the Service and Distribution Plans
The Plans permit Institutional Service Class shares to pay distribution and
service fees at the maximum annual rate of 1.00% of the class' average daily
net assets for the year. The Fund's governing board has limited the amount
the Institutional Service Class may pay under the Plans to 0.40% of the class'
average daily net assets for the year, and may increase such amount to the
plan maximum at any time.
The Fund will not reimburse the Distributor or others for distribution
expenses incurred in excess of the amount permitted by the Plans.
30
<PAGE>
Subject to seeking best price and execution, the Fund may buy or sell
portfolio securities through firms that receive payments under the Plans.
UAMFDI, at its own expense, may pay dealers for aid in distribution or for aid
in providing administrative services to shareholders.
Distribution Plan Expenses
------------------------------------------------------------------------------
NWQ Special Equity Portfolio $23,610
1999
Approving, Amending and Terminating the Fund's Distribution Arrangements
Shareholders of the portfolio have approved the Plans. The Plans also were
approved by the governing board of the Fund, including a majority of the
members of the board who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plans (Plan
Members), by votes cast in person at meetings called for the purpose of voting
on these Plans.
Continuing the Plans
The Plans continue in effect from year to year so long as they are approved
annually by a majority of the Fund's board members and its Plan Members. To
continue the Plans, the board must determine whether such continuation is in
the best interest of the Institutional Service Class shareholders and that
there is a reasonable likelihood of the Plans providing a benefit to the
Class. The Fund's board has determined that the Fund's distribution
arrangements are likely to benefit the Fund and its shareholders by enhancing
the Fund's ability to efficiently service the accounts of its Institutional
Service Class shareholders.
Amending the Plans
A majority of the Fund's governing board and a majority of its the Plan
Members must approve any material amendment to the Plans. Likewise, any
amendment materially increasing the maximum percentage payable under the Plans
must be approved by a majority of the outstanding voting securities of the
Class, as well as by a majority of the Plan Members.
Terminating the Plans
A majority of the Plan Members or a majority of the outstanding voting
securities of the Class may terminate the Plans at any time without penalty.
In addition, the Plans will terminate automatically upon their assignment.
Miscellaneous
So long as the Plans are in effect, the non-interested board members will
select and nominate the Plan Members of the Fund.
The Fund and UAMFDI intend to comply with the Conduct Rules of the National
Association of Securities Dealers relating to investment company sales
charges. with these rules.
Pursuant to the Plans, the board reviews, at least quarterly, a written report
of the amounts expended under each agreement with Service Agents and the
purposes for which the expenditures were made.
Additional Non-12b-1 Shareholder Servicing Arrangements
In addition to payments by the Fund under the Plans, UAM and any of its
affiliates, may, at its own expense, compensate a Service Agent or other
person for marketing, shareholder servicing, record-keeping and/or other
services performed with respect to the Fund, the portfolio or any class of
shares of the portfolio. The person making such payments may do so out of its
revenues, its profits or any other source available to it. Such services
arrangements, when in effect, are made generally available to all qualified
service providers. The adviser may also compensate its affiliated companies
for referring investors to the portfolio.
31
<PAGE>
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if the
Board specifically approves such continuance every year. The Board or UAMFSI
may terminate the Fund Administration Agreement, without penalty, on not less
than ninety (90) days' written notice. The Fund Administration Agreement
automatically terminates upon its assignment by UAMFSI without the prior
written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
32
<PAGE>
Administration and Transfer Agency Services Fees
The portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at the
following rates:
Annual Rate
------------------------------------------------------------------------
NWQ Special Equity Portfolio 0.043%
2. The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is calculated
at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM Funds
Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational class
and $2,500 for each additional class.
For the last three fiscal years the portfolio paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NWQ Special Equity Portfolio
1999 $16,236 $58,223 $74,459
- ----------------------------------------------------------------------------------------------------------
1998 $ 6,063 $56,235 $62,298
- ----------------------------------------------------------------------------------------------------------
1997 $ 0 $ 0 $ 0
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
Brokerage Allocation and Other Practices
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
33
<PAGE>
The Investment Advisory Agreement authorizes the adviser to select the brokers
or dealers that will execute the purchases and sales of investment securities
for the portfolio. The Investment Agreement also directs the adviser to use
its best efforts to obtain the best execution with respect to all transactions
for the portfolio. The adviser may select brokers based on research,
statistical and pricing services they provide to the adviser. Information and
research provided by a broker will be in addition to, and not instead of, the
services the adviser is required to perform under the Investment Advisory
Agreement. In so doing, the portfolio may pay higher commission rates than
the lowest rate available when the adviser believes it is reasonable to do so
in light of the value of the research, statistical, and pricing services
provided by the broker effecting the transaction.
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for
their clients.
SIMULTANEOUS TRANSACTIONS
- -------------------------------------------------------------------------------
The adviser makes investment decisions for the portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the same
security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolio, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- -------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, the portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When the portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
Commissions Paid
For the last three fiscal years, the portfolio paid the following in brokerage
commissions:
Brokerage Commissions
- -----------------------------------------------------------------------------
NWQ Special Equity Portfolio
1999 $21,636
- -----------------------------------------------------------------------------
1998 $37,253
34
<PAGE>
1997 $ 0
Capital Stock and Other Securities
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its name
to "UAM Funds, Inc." The Fund's principal executive office is located at 211
Congress Street, Boston, MA 02110; however, shareholders should direct all
correspondence to the address listed on the cover of this SAI. The Fund is an
open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- -------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing board
to issue three billion shares of common stock, with a $.001 par value. The
governing board has the power to create and designate one or more series
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder approval.
When issued and paid for, the shares of each series and class of the Fund are
fully paid and nonassessable, and have no pre-emptive rights or preference as
to conversion, exchange, dividends, retirement or other features.
The shares of each series and class have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of members of the governing board can elect all of the members if they choose
to do so. On each matter submitted to a vote of the shareholders, a
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books
of the Fund. Shares of all classes will vote together as a single class except
when otherwise required by law or as determined by the members of the Fund's
governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. The liquidation of any portfolio
or class thereof may be authorized at any time by vote of a majority of the
members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are identical
in all respects. Unlike Institutional and Adviser Class Shares, Institutional
Service Class Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Adviser
Class Shares impose a sales load on purchases. The classes also have
different exchange privileges. The net income attributable to Institutional
Service Class Shares and the dividends payable on Institutional Service Class
Shares will be reduced by the amount of the shareholder servicing and
distribution fees; accordingly, the net asset value of the Institutional
Service Class Shares will be reduced by such amount to the extent a portfolio
has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
35
<PAGE>
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year so that the portfolio itself generally will be relieved
of federal income and excise taxes. If the portfolio were to fail to so
qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction.
The portfolio's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to the
NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. For purposes of this calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
36
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued neither exceeding the asked prices nor less than
the bid prices. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The converted value is based upon the
bid price of the foreign currency against U.S. dollars quoted by any major
bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- -------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the Fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "How the Fund Values it Assets" at the next
determination of net asset value after acceptance. The Fund will issue shares
of the portfolio at the NAV of the portfolio determined as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
<PAGE>
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and that
there are no restrictions on their resale imposed by the 1933 Act or
otherwise;
. All dividends, interest, subscription, or other rights pertaining to such
securities become the property of the portfolio and are delivered to the
fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all securities
of the same issuer held by the portfolio cannot exceed 5% of the net assets
of the portfolio. This condition does not apply to U.S. government
securities.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for federal income tax purposes depending upon the cost of securities
or local currency exchanged. Investors interested in such exchanges should
contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of shares or
dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and other
organizations.
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to receive
redemption proceeds. To change an account in this manner, you must submit a
written request signed by each shareholder, with each signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable for
any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the UAMSSC
does not employ the procedures described above. Neither the Fund nor the
UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to be
genuine.
38
<PAGE>
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment of
redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth
under "Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to issue signature
guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
39
<PAGE>
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The governing
board of the Fund may restrict the exchange privilege at any time. Such
instructions may include limiting the amount or frequency of exchanges and may
be for the purpose of assuring such exchanges do not disadvantage the Fund and
its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
PERFORMANCE CALCULATIONS
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. The performance is calculated separately for each
Class of the portfolio. Dividends paid by the portfolio with respect to each
Class will be calculated in the same manner at the same time on the same day
and will be in the same amount, except that service fees, distribution charges
and any incremental transfer agency costs relating to Institutional Service
Class Shares will be borne exclusively by that class.
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in the portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a stated
period. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
The fund calculates the average annual total return of the portfolio by
finding the average annual compounded rates of return over one, five and ten-
year periods that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each one, five and ten-year period and the
deduction of all applicable Fund expenses on an annual basis. Since
Institutional Service Class Shares bear additional service and distribution
expenses, their average annual total return will generally be lower than that
of the Institutional Class Shares.
40
<PAGE>
The fund calculates these figures according to the following formula:
P (1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
Set forth in the table below are the portfolio's average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from the
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION> Shorter of
10Years or Since
One Year Five Years Inception Inception Date
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Class 19.33% N/A 9.28% 11/4/97
- ------------------------------------------------------------------------------------------------------------------------------
Institutional Service Class 18.79% N/A 9.40% 11/7/97
</TABLE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in the portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds. As
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
base period. Since Institutional Service Class shares bear additional service
and distribution expenses, their yield will generally be lower than that of
the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)6-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period.
41
<PAGE>
COMPARISONS
- --------------------------------------------------------------------------------
The portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported
in financial and industry publications, and various indices as further
described in this SAI. This information may also be included in sales
literature and advertising.
To help investors better evaluate how an investment in the portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated
above) to performance as reported by other investments, indices and averages.
Please see "Comparative Benchmarks" for publications, indices and averages
that may be used.
In assessing such comparisons of performance, an investor should keep in mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by the portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that the portfolio will continue this
performance as compared to such other averages.
FINANCIAL STATEMENTS
The following documents are included in the portfolio's October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolio's Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolio's Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
GLOSSARY
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board Member refers to a single member of the Fund's Board.
42
<PAGE>
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Distribution Plan refers to the Distribution Plan the Fund has adopted for its
Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board," the NYSE is located on Wall Street and is the largest exchange in the
United States.
Plan member refers to members of the board who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of the Plans.
Plans refers to the Distribution and Shareholder Servicing Plans the Fund has
adopted for its Service Class Shares pursuant to Rule 12b-1 under the 1940
Act.
SEC is the Securities and Exchange Commission. The SEC is the federal agency
that administers most of the federal securities laws in the United States. In
particular, the SEC administers the 1933 Act, the 1940 Act and the 1934 Act.
Service Plan refers to the Shareholder Servicing Plan the Fund has adopted for
its Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Service Class means the Institutional Service Class shares of a portfolio.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-shareholder-
servicing agent.
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance
the earnings and asset protection will remain relatively well-
maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classification, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
43
<PAGE>
baa An issue that which is rated "baa" is considered to be a medium--
grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present
but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of
eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each rating
minus (-) classification: the modifier 1 indicates that the security ranks
in the higher end of its generic rating catefory; the modifier 2
indicates a mid-range ranking and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt-edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
44
<PAGE>
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals) Bonds
for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in operating experience, (c)
rentals that begin when facilities are completed, or (d) payments
to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
. Leading market positions in well-established industries.
. Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
. Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
45
<PAGE>
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligation.
The effect of industry characteristics and market compositions
may be more pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations
are typically rated lower than senior obligations, to reflect the lower
priority in bankruptcy, as noted above. Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to meet
its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the
obligation.
Obligations rated 'BB', 'B', 'CCC' , 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
46
<PAGE>
BB An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposures to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment,
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on
the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated 'C' is
CURENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been
filed or similar action taken, but payments on this obligation
are being continued. A 'C' will also be assigned to a preferred
stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the
credit rating. Examples include: obligation linked or indexed to
equities, currencies, or commodities; obligations exposed to
severe prepayment risk - such as interest-only or principal-only
mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that
Standard & Poor's does not rate a particular obligation as a
matter of policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
47
<PAGE>
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not
expired, unless Standard & Poors' believes that such payments
will be made during such grace period. The 'D' rating also will
be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identity those instances where sovereign risks make them different for the
same issuer.
DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of
economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient
BBB- for prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors
fluctuate according to industry conditions. Overall quality may
move up or down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation will
not be met when due. Financial protection factors will fluctuate
widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating
grade.
<PAGE>
CCC Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case
of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
49
<PAGE>
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.
This is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a
possibility of credit risk developing, particularly as the
result of adverse economic change over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Highly speculative. `B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A
`CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD,DD,D Default. The ratings of obligations in this category are
based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and
cannot be estimated with any precision, the following serve
as general guidelines. "DDD" obligations have the highest
potential for recovery, around 90%-100% of outstanding
amounts and accrued interest. "D" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or
all of their obligations. Entities rated "DDD" have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated
"DD" are likely to satisfy a higher portion of their
outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for
timely payment of financial commitments; may have an added
"+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term
adverse changes could result in a reduction to non-
investment grade.
50
<PAGE>
B Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' long-term
rating category, to categories below `CCC', or to short-term ratings other
than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically
resolved over a relatively short period.
Comparative Benchmarks
(alphabetically)
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time in
the price of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market
fund yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on
the New York Stock Exchange. It has been a widely followed indicator of the
stock market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New
York Times, Personal Investor, The Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund performance
over specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
51
<PAGE>
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-weighted
index maintained by the International Finance Corporation. This index consists
of over 890 companies in 26 emerging equity markets, and is designed to
measure more precisely the returns portfolio managers might receive from
investment in emerging markets equity securities by focusing on companies and
markets that are legally and practically accessible to foreign investors.
Lehman Brothers Indices:
------------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues, agency
issues, corporate bond issues and mortgage backed securities. It includes
fixed rate issuers of investment grade (BBB) or higher, with maturities of at
least one year and outstanding par values of at least $100 million for U.S.
government issues and $25 million for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate debt.
Also included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued
debt of U.S. government agencies and quasi-federal corporations, and corporate
debt guaranteed by the U.S. government). In addition to the aggregate index,
sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of
at least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded during
the month is held in the index until month end and then removed. All returns
are market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity and
an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with
12 indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment objectives
were changed while other equity objectives remain unchanged. Changing
investment objectives include Capital Appreciation Funds, Growth Funds, Mid-
Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income
52
<PAGE>
Funds, and Equity Income Funds. Unchanged investment objectives include Sector
Equity Funds, World Equity Funds, Mixed Equity Funds, and certain other funds
including all Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group;
2) number of component funds remains the same (30); 3) component funds are
defined annually; 4) can be linked historically; and 5) are used as a
benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but
are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt
issues (BBB or higher) with dollar-weighted average maturities of one to five
years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing 60%
or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by prospectus
or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to
grow significantly faster than the earnings of the stocks represented in the
major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions, exclusive
of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities
from 1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market value-
weighted averages of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
53
<PAGE>
Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
----------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of
the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000
Index.
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell
Top 200 companies with higher price-to-book ratios and higher forecasted
growth values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
54
<PAGE>
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and does
not reflect any transaction costs. Direct investment in the index is not
possible.
Standard & Poor's U.S. Indices:
-------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10
economic sectors aggregated from 23 industry groups, 59 industries, and 123
sub-industries covering almost 6,000 companies globally. The new
classification standard will be used with all of their respective indices.
Features of the new classification include 10 economic sectors, rather than
the 11 S&P currently uses. Sector and industry gradations are less severe.
Rather than jumping from 11 sectors to 115 industries under the former S&P
system, the new system progresses from 10 sectors through 23 industry groups,
50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its market
value. It is used by over 95% of U.S. managers and pension plan sponsors. More
than $25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The
index is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred
benchmark for both active and passive management due to its low turnover and
greater liquidity. Approximately $8 billion is indexed to the S&P SmallCap
600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80%
of the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including 23
electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
---------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
55
<PAGE>
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
---------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as
the new Canadian large cap benchmark and will ultimately replace the Toronto
35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan --
are represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad
enough to provide representation of the market, but narrow enough to ensure
liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization)
of the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
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<PAGE>
Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used
by the institutional investment community as a broad measure of the
performance of public real estate equity for asset allocation and performance
comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
57
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The Rice, Hall, James Portfolios
Rice, Hall, James Small Cap Portfolio
Rice, Hall, James Small/Mid Cap Portfolio
Institutional Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the portfolios dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address
listed above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments...................................... 1
What Investment Strategies May the Portfolios Use?...................... 1
Debt Securities......................................................... 2
Derivatives............................................................. 9
Equity Securities....................................................... 17
Foreign Securities...................................................... 19
Investment Companies.................................................... 22
Repurchase Agreements................................................... 23
Restricted Securities................................................... 23
Securities Lending...................................................... 23
When Issued Transactions................................................ 23
Investment Policies of the Portfolios..................................... 24
Fundamental Policies.................................................... 24
Non-Fundamental Policies................................................ 24
Management Of The Fund.................................................... 25
Principal Shareholders.................................................... 25
Investment Advisory and Other Services.................................... 27
Investment Adviser...................................................... 27
Distributor............................................................. 27
Shareholder Servicing Arrangements...................................... 30
Administrative Services................................................. 30
Custodian............................................................... 30
Independent Accountants................................................. 32
Brokerage Allocation and Other Practices.................................. 32
Selection of Brokers.................................................... 32
Simultaneous Transactions............................................... 32
Brokerage Commissions................................................... 32
Capital Stock and Other Securities........................................ 33
Description Of Shares And Voting Rights................................. 33
Purchase, Redemption and Pricing of Shares................................ 33
Net Asset Value Per Share............................................... 35
Purchase of Shares...................................................... 35
Redemption of Shares.................................................... 36
Exchange Privilege...................................................... 36
Transfer Of Shares...................................................... 38
Performance Calculations.................................................. 38
Total Return............................................................ 39
Yield................................................................... 39
Comparisons............................................................. 40
Financial Statements...................................................... 40
Glossary.................................................................. 41
Bond Ratings.............................................................. 42
Moody's Investors Service, Inc.......................................... 42
Standard & Poor's Ratings Services...................................... 45
Duff & Phelps Credit Rating Co.......................................... 47
Fitch IBCA Ratings...................................................... 49
Comparative Benchmarks.................................................... 50
</TABLE>
<PAGE>
Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIOS USE?
- --------------------------------------------------------------------------------
The portfolios currently intend to use the securities and investment
strategies listed below in seeking their objectives; however, they may at any
time invest in any of the investment strategies described in this SAI. This
SAI describes each of these investments/strategies and their risks. A
portfolio may not notify shareholders before employing new strategies, unless
it expects such strategies to become principal strategies. The investments
that are italicized are principal strategies and you can find more information
on these techniques in the prospectus of the portfolio. You can find more
information concerning the limits on the ability of the portfolios to use
these investments in "What Are the Investment Policies of the Portfolios?"
Small Cap Portfolio
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Small/Mid Cap Portfolio
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
1
<PAGE>
DEBT SECURITIES
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Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities, such
as zero-coupon bonds, do not pay current interest and are purchased at a
discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities include
treasury notes, which have initial maturities of one to ten years and treasury
bonds, which have initial maturities of at least ten years and certain types
of mortgage-backed securities that are described under "Mortgage-Backed
Securities" and "Other Asset-Backed Securities." This SAI discusses mortgage-
backed treasury and agency securities in detail in the section called
"Mortgage-Backed Securities" and "Other Asset-Backed Securities."
The full faith and credit of the U.S. government supports treasury securities.
Unlike treasury securities, the full faith and credit of the U.S. government
generally do not back agency securities. Agency securities are typically
supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the
credit risk is minimal. The U.S. government does not guarantee the net asset
value of the assets of a portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors,
the corporation promises to pay investors interest, and repay the principal
amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part or
all of the loan balance before maturity, the effective maturity of a mortgage-
backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The adviser will consider
such insurance and guarantees and the creditworthiness of the issuers thereof
in determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or guarantors will
not meet their obligations under the insurance policies or guarantee
arrangements.
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Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of a
portfolio's shares. To buy GNMA securities, a portfolio may have to pay a
premium over the maturity value of the underlying mortgages, which the
portfolio may lose if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Securities issued by FNMA are agency securities,
which means FNMA, but not the U.S. government, guarantees their timely payment
of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these issuers
generally offer a higher rate of interest than pools created by GNMA, FNMA &
FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
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. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing a portfolio to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, a portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which allow debtors
to reduce their balances by offsetting certain amounts owed on the credit
cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such receivables to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities. Due
to the quantity of vehicles involved and requirements under state laws, asset-
backed securities backed by automobile receivables may not have a proper
security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
A portfolio may also invest in residual interests in asset-backed securities,
which is the excess cash flow remaining after making required payments on the
securities and paying related administrative expenses. The amount of residual
cash flow resulting from a particular issue of asset-backed securities depends
in part on the characteristics of the underlying assets, the coupon rates on
the securities, prevailing interest rates, the amount of administrative
expenses and the actual prepayment experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
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CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its assets
in the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a
short-term debt security has a maturity of one year or less.
Bank Obligations
A portfolio will only invest in a security issued by a commercial bank if the
bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
A portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. A portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See "Bond Ratings" for a description
of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. Typically, one class will receive
some of the interest and most of the principal, while the other
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class will receive most of the interest and the remaining principal. In
extreme cases, one class will receive all of the interest ("interest only" or
"IO" class) while the other class will receive the entire principal sensitive
to the rate of principal payments (including prepayments) on the underlying
mortgage loans or mortgage-backed securities. A rapid rate of principal
payments may adversely affect the yield to maturity of IOs. Slower than
anticipated prepayments of principal may adversely affect the yield to
maturity of a PO. The yields and market risk of interest only and principal
only stripped mortgage-backed securities, respectively, may be more volatile
than those of other fixed income securities, including traditional mortgage-
backed securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See
"FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold
at a discount from their face value. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. The amount of the
discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security
will have a longer duration than an ordinary debt security with the same
maturity. A portfolio's investments in pay-in-kind, delayed and zero coupon
bonds may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once
the holder of the security has stripped or separated corpus and coupons, it
may sell each component separately. The principal or corpus is then sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold bundled in such
form. The underlying treasury security is held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder thereof), in
trust on behalf of the owners thereof. Purchasers of stripped obligations
acquire, in effect, discount obligations that are economically identical to
the zero coupon securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," a portfolio can record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
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Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead, it
calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by a portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years --
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. A
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of a portfolio. If
left unattended, drifts in the average maturity of a portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
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Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of a portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation for
assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and complete
repayment of principal is less certain. The credit rating or financial
condition of an issuer may affect the value of a debt security. Generally,
the lower the quality rating of a security, the greater the risks that the
issuer will fail to pay interest and return principal. To compensate investors
for taking on increased risk, issuers with lower credit ratings usually offer
their investors a higher "risk premium" in the form of higher interest rates
above comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an adjustment
to this "risk premium." Since an issuer's outstanding debt carries a fixed
coupon, adjustments to the risk premium must occur in the price, which effects
the yield to maturity of the bond. If an issuer defaults or becomes unable to
honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause a portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's opinion,
not an absolute standard of quality, and they do not reflect an evaluation of
market risk. The section "Bond Ratings" contains further information
concerning the ratings of certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time a portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. A portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
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DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner,
to reduce transaction costs or to remain fully invested. They may also invest
in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates. Investing in derivatives
for these purposes is known as "hedging." When hedging is successful, the
portfolio will have offset any depreciation in the value of its portfolio
securities by the appreciation in the value of the derivative position.
Although techniques other than the sale and purchase of derivatives could be
used to control the exposure of the portfolio to market fluctuations, the use
of derivatives may be a more effective means of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party
sells and the other party agrees to buy a specified amount of a financial
instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index,
interest rate, foreign exchange rate or other similar instrument. Agreeing to
buy the underlying financial information is called buying a futures contract
or taking a long position in the contract. Likewise, agreeing to sell the
underlying financial instrument is called selling a futures contract or
taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date
(the delivery date). Contract markets require both the purchaser and seller
to deposit "initial margin" with a futures broker, known as a futures
commission merchant, when they enter into the contract. Initial margin
deposits are typically equal to a percentage of the contract's value. After
they open a futures contract, the parties to the transaction must compare the
purchase price of the contract to its daily market value. If the value of the
futures contract changes in such a way that a party's position declines, that
party must make additional "variation margin" payments so that the margin
payment is adequate. On the other hand, the value of the contract may change
in such a way that there is excess margin on deposit, possibly entitling the
party that has a gain to receive all or a portion of this amount. This
process is known as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the sale price upon closing out the contract is less than the
original purchase price, the person closing out the contract will realize a
loss. If the sale price upon closing out the contract is more that the
original purchase price, the person closing out the contract will realize a
gain. The opposite is also true. If the purchase price upon closing out the
contract is more than the original sale price, the person closing out the
contract will realize a loss. If the purchase price upon closing out the
contract is less than the original sale price, the person closing out the
contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
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Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the exercise price
plus the premium paid and related transaction costs. Otherwise, the portfolio
would realize either no gain or a loss on the purchase of the call
option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
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The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put option
to expire and the premium it received to offset the increase in the security's
value. If security prices remain the same over time, the portfolio would hope
to profit by closing out the put option at a lower price. If security prices
fall, the portfolio may lose an amount of money equal to the difference
between the value of the security and the premium it received. Writing covered
put options may deprive the portfolio of the opportunity to profit from a
decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the difference
between the exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the
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case of a call option) or a corresponding long position (in the case of a put
option). If the option is exercised, the parties will be subject to the
futures contracts. In addition, the writer of an option on a futures contract
is subject to initial and variation margin requirements on the option
position. Options on futures contracts are traded on the same contract market
as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead
of selling or buying futures contracts. The portfolio may buy a put option on
a futures contract for the same reasons it would sell a futures contract. It
also may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures
contracts, such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the portfolio would retain the option premium, which would offset, in part,
any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if the market price declines, the
portfolio would pay more than the market price for the underlying instrument.
The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed
to futures contracts which are traded only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
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Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing rates,
security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the portfolio,
the portfolio must be prepared to make such payments when due. In addition, if
the counter-party's creditworthiness declined, the value of a swap agreement
would be likely to decline, potentially resulting in losses.
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Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the
prior written consent of the other party. The portfolio may be able to
eliminate its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counter-party is unable to
meet its obligations under the contract, declares bankruptcy, defaults or
becomes insolvent, the portfolio may not be able to recover the money it
expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the SEC. If the portfolio enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the portfolio's accrued obligations under the
swap agreement over the accrued amount the portfolio is entitled to receive
under the agreement. If the portfolio enters into a swap agreement on other
than a net basis, it will segregate assets with a value equal to the full
amount of the portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of interest
rate cash flow on specified dates in the future. Some of the different types
of interest rate swaps are "fixed-for floating rate swaps," "termed basis
swaps" and "index amortizing swaps." Fixed-for floating rate swap involve the
exchange of fixed interest rate cash flows for floating rate cash flows.
Termed basis swaps entail cash flows to both parties based on floating
interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the portfolio enters into a swap where it agrees to exchange a
floating rate of interest for a fixed rate of interest, the portfolio may have
to pay more money than it receives. Similarly, if the portfolio enters into a
swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the portfolio may receive less money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in which
one party agrees to make interest rate payments in one currency and the other
promises to make interest rate payments in another currency. A portfolio may
enter into a currency swap when it has one currency and desires a different
currency. Typically the interest rates that determine the currency swap
payments are fixed, although occasionally one or both parties may pay a
floating rate of interest. Unlike an interest rate swap, however, the
principal amounts are exchanged at the beginning of the contract and returned
at the end of the contract. Changes in foreign exchange rates and changes in
interest rates, as described above may negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
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Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the portfolio than if it had not entered into
any derivatives transactions. Derivatives may magnify the portfolio's gains
or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities the portfolio is hedging may not move
in the same amount, or even in the same direction as the hedging instrument.
The adviser will try to minimize this risk by investing only in those
contracts whose behavior it expects to resemble the portfolio securities it is
trying to hedge. However, if the portfolio's prediction of interest and
currency rates, market value, volatility or other economic factors is
incorrect, the portfolio may lose money, or may not make as much money as it
expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
. current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
. differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the participation of
speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on
a broad market index. Since narrower indices are made up of a smaller number
of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration in
the issuer's creditworthiness. Because the value of the portfolio's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the portfolio's investments precisely over time.
Lack of Liquidity
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Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange
the contract was initially traded. Although a portfolio intends to purchase
options and futures only where there appears to be an active market, there is
no guarantee that such a liquid market will exist. If there is no secondary
market for the contract, or the market is illiquid, the portfolio may not be
able to close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum
amount that the price of a derivative may vary from the settlement price of
that derivative at the end of trading on the previous day. Once the price of
a derivative reaches this value, a portfolio may not trade that derivative at
a price beyond that limit. The daily limit governs only price movements
during a given day and does not limit potential gains or losses. Derivative
prices have occasionally moved to the daily limit for several consecutive
trading days, preventing prompt liquidation of the derivative.
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Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give
the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price that
is usually higher than the market price at the time the warrant is issued.
Corporations often issue warrants to make the accompanying debt security more
attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying
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securities, and they do not represent any rights in the assets of the issuer.
In addition, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised
on or before their expiration date. Investing in rights and warrants increases
the potential profit or loss to be realized from the investment as compared
with investing the same amount in the underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to
the company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of
their small or medium size, limited markets and financial resources, narrow
product lines and frequent lack of management depth. The securities of small
and medium companies are often traded in the over-the-counter market and might
not be traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
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FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a
foreign currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities. EDRs are
similar to ADRs, except that they are typically issued by European Banks or
trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank
for Reconstruction and Development (World Bank) and the International
Finance Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. Investments in these investment funds are subject
to the provisions of the 1940 Act. Shareholders of a UAM Fund that invests
in such investment funds will bear not only their proportionate share of
the expenses of the UAM Fund (including operating expenses and the fees of
the adviser), but also will bear indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may trade
at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
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Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in foreign
securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit the portfolio's ability to invest in a particular country or
make it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
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Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the
United States dollar will result in a corresponding change in value of
securities denominated in that currency. Some of the factors that may impair
the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover
a portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
21
<PAGE>
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that adopt the Euro
in all aspects of the investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custody and accounting. Some of the
uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by a portfolio. Like other shareholders, each portfolio
would pay its proportionate share of those fees. Consequently, shareholders
of a portfolio would pay not only the management fees of the portfolio, but
also the management fees of the investment company in which the portfolio
invests. A portfolio may invest up to 10% of its total assets in the
securities of other investment companies, but may not invest more than 5% of
its total assets in the securities of any one investment company or acquire
more than 3% of the outstanding securities of any one investment company.
The SEC has granted an order that allows a portfolio to invest the greater of
5% of its total assets or $2.5 million in the UAM DSI Money Market Portfolio,
provided that the investment is:
. For cash management purposes;
. Consistent with a portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
22
<PAGE>
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When a portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, a portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before a portfolio can sell it and a portfolio might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
- --------------------------------------------------------------------------------
The portfolios may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by a
portfolio or less than what may be considered the fair value of such
securities.
SECURITIES LENDING
- --------------------------------------------------------------------------------
A portfolio may lend a portion of its total assets to broker- dealers or other
financial institutions. It may then reinvest the collateral it receives in
short-term securities and money market funds. When a portfolio lends its
securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U. S.
government;
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
23
<PAGE>
WHEN ISSUED TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, a
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future. In
each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or deliver securities
until a later date. Typically, no income accrues on securities a portfolio
has committed to purchase before the securities are delivered, although the
portfolio may earn income on securities it has in a segregated account. A
portfolio will only enter into these types of transactions with the intention
of actually acquiring the securities, but may sell them before the settlement
date.
A portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When a portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, a
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because a portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
A portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. A portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolios
A portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, a
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following investment limitations are fundamental, which means a portfolio
cannot change them without approval by the vote of a majority of the
outstanding voting securities of the portfolio, as defined by the 1940 Act.
Each of the portfolio will not:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the of the
U.S. government or any if its agencies or instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 33 1/3% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
24
<PAGE>
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1) making any
permitted borrowings, mortgages or pledges, or (2) entering into options,
futures or repurchase transactions.
. Make loans except by purchasing debt securities in accordance with its
investment objective and policies, entering into repurchase agreements, or
by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as the loans are in compliance with the 1940
Act and the rules and regulations or interpretations of the SEC.
. Purchase or sell real estate or real estate limited partnerships, although
it may purchase and sell securities of companies which deal in real estate
and may purchase and sell securities which are secured by interests in real
estate.
. Underwrite the securities of other issuers.
NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means a portfolio may
change them without shareholder approval.
Each portfolio will not:
. Invest in stock or bond futures and/or options on futures unless (1) not
more than 5% of the portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts
provided; however, that in the case of an option that is in-the-money may
be excluded in computing such 5% and (2) not more than 20% of the
portfolio's assets are invested in stock or bond futures and options on
futures.
. Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. Invest more than 15% of the portfolio's assets in foreign based companies.
. Invest more than an aggregate of 15% of the net assets of the portfolio,
determined at the time of investment, in securities subject to legal or
contractual restrictions on resale or securities for which there are no
readily available markets, including repurchase agreements having
maturities of more than seven days.
. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 33 1/3% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total assets.
. Purchase on margin or sell short, except as permitted herein.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to execute
policies the board has formulated. The Fund pays each board member who is not
also an officer or affiliated person (independent board member) a $150
quarterly retainer fee per active portfolio and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and
other expenses incurred while attending board meetings. The $2,000 meeting
fee and expense reimbursements are aggregated for all of the board members and
allocated proportionately among the portfolios of the UAM Funds Complex. The
Fund does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's officers.
25
<PAGE>
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from the
UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act. Mr.
English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in the
UAM Funds Complex. However, the Fund does not believe that the relationship
is a material business relationship, and, therefore, does not consider him to
be an "interested person" of the Fund. If these circumstances change, the
Board will determine whether any action is required to change the composition
of the Board.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
From the Fund Complex as of
Name, Address, Position Principal Occupations During the as of October October 31,
DOB with Fund Past 5 years 31, 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management $7,137 $10,625
College Road -- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company, Inc.; President of Bennett
1/26/29 Management Company from 1988 to 1993.
- -----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund since $7,137 $10,625
1250 24th St., NW Member January 1999; Vice President for Finance and
Washington, DC 20037 Administration and Treasurer of Radcliffe College
8/14/51 from 1991 to 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief $7,137 $10,625
100 King Street West Member Administrative Officer of Philip Services Corp.;
P.O. Box 2440, LCD-1 Formerly, a Partner in the Philadelphia office
Hamilton Ontario, of the law firm Dechert Price & Rhoads and a
Canada L8N-4J6 Director of Hofler Corp.
4/21/42
- -----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of $7,137 $10,625
16 West Madison Street Member Broventure Company, Inc.; Chairman of the Board
Baltimore, MD 21201 of Chektec Corporation and Cyber Scientific, Inc.
8/5/48
- -----------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, Inc. since 0 0
211 Congress Street Member March 1999; Vice President UAM Trust Company since
Boston, MA 02110 January 1996; Principal of UAM Fund Distributors,
2/24/53 Inc. since December 1995; Vice President of UAM
Investment Services, Inc. from January 1996 to March
1999 and a Director and Chief Operating Officer of CS
First Boston Investment Management from 1993-1995.
- -----------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director of 0 0
One International Place Member; United Asset Management Corporation; Director,
Boston, MA 02110 President Partner or Trustee of each of the Investment
3/21/35 and Chairman Companies of the Eaton Vance Group of Mutual Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of Dewey 0 0
One Financial Center Member Square Investors Corporation since 1988; Director and
Boston, MA 02111 Chief Executive Officer of H.T. Investors, Inc.,
7/1/43 formerly a subsidiary of Dewey Square.
- -----------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial Officer 0 0
One International Place President of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- -----------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of the 0 0
211 Congress Street Fidelity Group of Mutual Funds from 1991 to 1995;
Boston, MA 02110 held various other offices with Fidelity Investments
7/4/51 from November 1990 to March 1995.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
From the Fund Complex as of
Name, Address, Position Principal Occupations During the as of October October 31,
DOB with Fund Past 5 years 31, 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase Global
Boston, MA 02110 Fund Services Company from 1995 to 1996; Senior
9/18/63 Manager of Deloitte & Touche LLP from
1985 to 1995,
- -----------------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI 0 0
SEI Investments Treasurer Investments; Senior Manager at Arthur
One Freedom Valley Rd. Andersen prior to 1994.
Oaks, PA 19456
12/17/63
</TABLE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned Portfolio Class
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles Schwab & Co Inc 41.92% Rice Hall James Small Institutional Class
Reinvest Account Cap Portfolio Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
- -----------------------------------------------------------------------------------------------------------------------------------
Frank Russell Trust Co. Inc. TR 33.95% Rice Hall James Institutional Class
FBO ICL Choice & Retirement Program 401K Small/Mid Cap Shares
Defined Contribution Trust Portfolio
909 A Street
Tacoma, WA 98402-5120
- -----------------------------------------------------------------------------------------------------------------------------------
California Lutheran University 7.13% Rice Hall James Institutional Class
60 West Olsen Road #1200 Small/Mid Cap Shares
Thousand Oaks, CA 93360-2787
- -----------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 6.14% Rice Hall James Institutional Class
Reinvest Account Small/Mid Cap Shares
Attn: Mutual Funds Portfolio
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolios.
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
27
<PAGE>
Rice, Hall, James & Associates, a California corporation located at 600 West
Broadway, Suite 1000, San Diego, CA 92101, is the investment adviser to each
portfolio. The adviser manages and supervises the investment of the
portfolios' assets on a discretionary basis. The adviser, an affiliate of
United Asset Management Corporation, has provided investment management
services to individual and institutional investors since 1974.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds Complex.
Portfolio Management
Teams of investment professionals are primarily responsible for the day-to-day
management of the portfolios. Listed below are the investment professionals
that comprise those teams and a brief description of their business
experience.
<TABLE>
<CAPTION>
Name and Title Experience
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Samuel R. Trozzo Mr. Trozzo has over thirty-seven years' investment experience. Prior to founding the adviser in 1974,
Chairman Mr. Trozzo was Vice President and Senior Investment Officer of Southern California First National Bank.
He is a former member of the State of California Board of Administration/ Investment Committee Public
Employees Retirement System. He is a graduate of Kent State University.
- -----------------------------------------------------------------------------------------------------------------------------------
Thomas W. McDowell, Jr. Mr. McDowell has over sixteen years' investment experience. Mr. McDowell joined the adviser in 1984.
President and Chief Prior to that time, he was Investment Officer, Security Analyst and Portfolio Manager at California
Executive Officer First Bank. He earned his B.A. degree from the University of California, Los Angeles and his M.B.A.
from San Diego State University.
- -----------------------------------------------------------------------------------------------------------------------------------
David P. Tessmer Mr. Tessmer has thirty-one years' investment experience. Prior to joining the adviser in 1986,
Partner and Co-Director of Mr. Tessmer was Vice President and Senior Portfolio Manager at The Pacific Century Group, San
Research Diego. He earned his B.S. degree in Investment Management at Northwestern University and his M.B.A. in
Finance at Columbia Graduate School of Business.
- -----------------------------------------------------------------------------------------------------------------------------------
Timothy A. Todaro Mr. Todaro has seventeen years' investment experience. Mr. Todaro joined the adviser in 1983.
Partner and Co-Director of Prior to that time, he was Senior Investment Analyst at Comerica Bank, Detroit, Michigan. Mr.
Research Todaro earned his B.A. in Economics at the University of California, San Diego and his M.B.A. degree in
Finance/International Business at the University of Wisconsin, Madison. He is a Chartered Financial
Analyst.
- -----------------------------------------------------------------------------------------------------------------------------------
Gary S. Rice Mr. Rice has fourteen years' investment experience. Mr. Rice was an Account Administrator with the
Partner Trust Division at Federated Investors, Inc., Pittsburgh, Pennsylvania prior to joining the adviser
in 1983. He earned his B.A. degree in Economics/Business Administration at Vanderbilt University.
- -----------------------------------------------------------------------------------------------------------------------------------
Douglas Sheres Mr. Sheres has over six years' investment experience. Prior to joining the adviser in March of 1998,
Partner he was an Institutional Sales professional with Merrill Lynch in San Diego from May 1996 until February
1998. Previously he was a Research Analyst with Pacific Asset Management from January 1994 until May
1996. He began his career in January 1993 as a Demographics Consultant with I Cubed Information
Strategies after graduating from the University of California San Diego with a B.A. in Psychology.
</TABLE>
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Fund has filed each agreement with the SEC as part
of its registration statement on Form N-1A.
28
<PAGE>
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of a portfolio's assets;
. Continuously reviews, supervises and administers the investment program of
a portfolio; and
. Determines what portion of a portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Investment Advisory Agreement, (2) reckless disregard by the adviser of
its obligations and duties under the Investment Advisory Agreement, or (3) a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Board Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, each portfolio pays its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of the
portfolio. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that a portfolio pays in any given year may
be different from the rate set forth in its contract with the adviser. For
the last three fiscal years, the portfolios paid the following in management
fees to the adviser:
29
<PAGE>
<TABLE>
<CAPTION>
Investment Advisory Fees Investment Advisory Fees Total Investment Advisory
Paid Waived Fees
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Portfolio
1999 $344,628 $0 $344,628
- -------------------------------------------------------------------------------------------------------------------------------
1998 $367,727 $0 $367,727
- -------------------------------------------------------------------------------------------------------------------------------
1997 $320,608 $0 $320,608
- -------------------------------------------------------------------------------------------------------------------------------
Small/Mid Cap Portfolio
1999 $176,486 $ 71,187 $105,299
- -------------------------------------------------------------------------------------------------------------------------------
1998 $101,144 $ 57,343 $ 43,801
- -------------------------------------------------------------------------------------------------------------------------------
1997 $0 $422,239 $0
</TABLE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services. UAMFDI, an affiliate of UAM, is located at 211
Congress Street, Boston, Massachusetts 02110.
SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------
UAM and each of its affiliates, may, at its own expense, compensate a Service
Agent or other person for marketing, shareholder servicing, record-keeping
and/or other services performed with respect to the Fund or the portfolio. The
person making such payments may do so out of its revenues, its profits or any
other source available to it. Such services arrangements, when in effect, are
made generally available to all qualified service providers. The adviser may
also compensate its affiliated companies for referring investors to the
portfolio.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
30
<PAGE>
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if the
Board specifically approves such continuance every year. The Board or UAMFSI
may terminate the Fund Administration Agreement, without penalty, on not less
than ninety (90) days' written notice. The Fund Administration Agreement
automatically terminates upon its assignment by UAMFSI without the prior
written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
Administration and Transfer Agency Services Fees
Each portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, a portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at
the following rates:
<TABLE>
<CAPTION>
Annual Rate
--------------------------------------------------------------------------------------------------------------------------
<S> <C>
Small Cap Portfolio 0.043%
--------------------------------------------------------------------------------------------------------------------------
Small/Mid Cap Portfolio 0.043%
</TABLE>
2. Each portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is calculated
at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM Funds
Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational class
and $2,500 for each additional class.
31
<PAGE>
For the last three fiscal years the portfolios paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Portfolio
1999 $27,603 $70,286 $ 97,889
- ------------------------------------------------------------------------------------------------------------------------------
1998 $22,712 $80,210 $102,922
- ------------------------------------------------------------------------------------------------------------------------------
1997 $17,077 $76,774 $ 93,851
- ------------------------------------------------------------------------------------------------------------------------------
Small/Mid Cap Portfolio
1999 $17,445 $60,849 $ 78,294
- ------------------------------------------------------------------------------------------------------------------------------
1998 $10,762 $70,275 $ 81,037
- ------------------------------------------------------------------------------------------------------------------------------
1997 $ 2,112 $34,858 $ 36,970
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
Each Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect to
all transactions for the portfolio. The adviser may select brokers based on
research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and not
instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes it
is reasonable to do so in light of the value of the research, statistical, and
pricing services provided by the broker effecting the transaction.
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for
their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for each portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the same
security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolios, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
32
<PAGE>
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When a portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
Commissions Paid
For the last three fiscal years, the portfolios paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
- -------------------------------------------------------------------------------------
<S> <C>
Small Cap Portfolio
1999 $582,604
- -------------------------------------------------------------------------------------
1998 $123,079
- -------------------------------------------------------------------------------------
1997 $ 72,700
- -------------------------------------------------------------------------------------
Small/Mid Cap Portfolio
1999 $103,300
- -------------------------------------------------------------------------------------
1998 $ 63,203
- -------------------------------------------------------------------------------------
1997 $ 31,408
</TABLE>
CAPITAL STOCK AND OTHER SECURITIES
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its name
to "UAM Funds, Inc." The Fund's principal executive office is located at 211
Congress Street, Boston, MA 02110; however, shareholders should direct all
correspondence to the address listed on the cover of this SAI. The Fund is an
open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing board
to issue three billion shares of common stock, with a $.001 par value. The
governing board has the power to create and designate one or more series
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder approval.
When issued and paid for, the shares of each series and class of the Fund are
fully paid and
33
<PAGE>
nonassessable, and have no pre-emptive rights or preference as to conversion,
exchange, dividends, retirement or other features.
The shares of each series and class have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of members of the governing board can elect all of the members if they choose
to do so. On each matter submitted to a vote of the shareholders, a
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books
of the Fund. Shares of all classes will vote together as a single class except
when otherwise required by law or as determined by the members of the Fund's
governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. The liquidation of any portfolio
or class thereof may be authorized at any time by vote of a majority of the
members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are identical
in all respects. Unlike Institutional and Adviser Class Shares, Institutional
Service Class Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Adviser
Class Shares impose a sales load on purchases. The classes also have different
exchange privileges. The net income attributable to Institutional Service
Class Shares and the dividends payable on Institutional Service Class Shares
will be reduced by the amount of the shareholder servicing and distribution
fees; accordingly, the net asset value of the Institutional Service Class
Shares will be reduced by such amount to the extent a portfolio has
undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
Each portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year so that the portfolio itself generally will be relieved
of federal income and excise taxes. If a portfolio were to fail to so qualify:
(1) it would be taxed at regular corporate rates without any deduction for
distributions to shareholder; and (2) its shareholders would be taxed as if
they received ordinary dividends, although corporate shareholders could be
eligible for the dividends received deduction.
34
<PAGE>
A portfolios' dividends that are paid to their corporate shareholders and are
attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to the
NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. For purposes of this calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed securities
not traded on the valuation date for which market quotations are readily
available are valued neither exceeding the asked prices nor less than the bid
prices. Quotations of foreign securities in a foreign currency are converted
to U.S. dollar equivalents. The converted value is based upon the bid price of
the foreign currency against U.S. dollars quoted by any major bank or by a
broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
35
<PAGE>
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the Fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "How the Fund Values it Assets" at the next
determination of net asset value after acceptance. The Fund will issue shares
of the portfolio at the NAV of the portfolio determined as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and that
there are no restrictions on their resale imposed by the 1933 Act or
otherwise;
. All dividends, interest, subscription, or other rights pertaining to such
securities become the property of the portfolio and are delivered to the
fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all securities
of the same issuer held by the portfolio cannot exceed 5% of the net assets
of the portfolio. This condition does not apply to U.S. government
securities.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for federal income tax purposes depending upon the cost of securities
or local currency exchanged. Investors interested in such exchanges should
contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
36
<PAGE>
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of shares or
dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and other
organizations.
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to receive
redemption proceeds. To change an account in this manner, you must submit a
written request signed by each shareholder, with each signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable for
any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the UAMSSC
does not employ the procedures described above. Neither the Fund nor the
UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to be
genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment of
redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth
under "Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
37
<PAGE>
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Credit unions must be authorized to issue signature guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The governing
board of the Fund may restrict the exchange privilege at any time. Such
instructions may include limiting the amount or frequency of exchanges and may
be for the purpose of assuring such exchanges do not disadvantage the Fund and
its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
38
<PAGE>
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. The performance is calculated separately for each
portfolio.
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in a portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a stated
period. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
The fund calculates the average annual total return of a portfolio by finding
the average annual compounded rates of return over one, five and ten-year
periods that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each one, five and ten-year period and the
deduction of all applicable Fund expenses on an annual basis. Since
Institutional Service Class Shares bear additional service and distribution
expenses, their average annual total return will generally be lower than that
of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1,
5 or 10 year periods (or fractional portion thereof).
Set forth in the table below are the portfolios' average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from a
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION> Shorter of
10 Years or
One Year Five Years Since Inception Inception Date
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Small Cap Portfolio 24.21% 17.08% 18.28% 7/1/94
---------------------------------------------------------------------------------------------------------------------------------
Small/Mid Cap Portfolio 1.31% N/A 9.89% 11/1/96
</TABLE>
39
<PAGE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in a portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds. As
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
base period. Since Institutional Service Class shares bear additional service
and distribution expenses, their yield will generally be lower than that of
the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period.
COMPARISONS
- --------------------------------------------------------------------------------
A portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported
in financial and industry publications, and various indices as further
described in this SAI. This information may also be included in sales
literature and advertising.
To help investors better evaluate how an investment in a portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated
above) to performance as reported by other investments, indices and averages.
Please see "Comparative Benchmarks" for publications, indices and averages
that may be used.
In assessing such comparisons of performance, an investor should keep in mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in a portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by a portfolio to calculate its performance;
and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that a portfolio will continue this
performance as compared to such other averages.
40
<PAGE>
Financial Statements
The following documents are included in the portfolios' October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
41
<PAGE>
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser to each portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 Act, the 1940 Act and
the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-
shareholder-servicing agent.
Bond Ratings
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within
the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will
remain relatively well-maintained in the foreseeable future.
42
<PAGE>
a An issue which is rated "a" is considered to be an upper-
medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classification,
earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa An issue that which is rated "baa" is considered to be a
medium--grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great
length of time.
ba An issue which is rated "ba" is considered to have
speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in
this class.
b An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport
to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payments.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can thus be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each
minus (-) rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking and
the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
43
<PAGE>
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals)
Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin
when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category;
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics:
. Leading market positions in well-established
industries.
. Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
. Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
. Well-established access to a range of financial
markets and assured sources of alternate liquidity.
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Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the
level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations
are typically rated lower than senior obligations, to reflect the lower
priority in bankruptcy, as noted above. Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
AAA An obligation rated `AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA An obligation rated `AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very
strong.
A An obligation rated `A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated `BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
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<PAGE>
Obligations rated `BB', `B', `CCC' , `CC' and `C' are regarded as having
significant speculative characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB An obligation rated `BB' is less vulnerable to nonpayment
than other speculative issues. However, it faces major
ongoing uncertainties or exposures to adverse business,
financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated `B' is more vulnerable to nonpayment
than obligations rated `BB', but the obligor currently has
the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the
obligation.
CCC An obligation rated `CCC' is currently vulnerable to non-
payment, and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its
financial commitment on the obligations.
CC An obligation rated `CC' is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated `C'
is CURRENTLY HIGHLY VULNERABLE to non-payment. The `C'
rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but
payments on this obligation are being continued. A `C' will
also be assigned to a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently
paying.
D An obligation rated `D' is in payment default. The `D'
rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period
has not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. The `D'
rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an
obligation are jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include: obligation
linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as
interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as
inverse floaters.
N.R. This indicates that no rating has been requested, that there
is insufficient information on which to base a rating, or
that Standard & Poor's does not rate a particular obligation
as a matter of policy.
Plus (+) or minus (-): The ratings from `AA' to `CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated `A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to
meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these
obligations is extremely strong.
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<PAGE>
A-2 A short-term obligation rated `A-2' is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated `A-3' exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B A short-term obligation rated `B' is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated `C' is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated `D' is in payment default. The
`D' rating category is used when payments on an obligation
are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors' believes
that such payments will be made during such grace period.
The `D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment
is a key factor in this analysis. An obligor's capacity to repay foreign
currency obligations may be lower than its capacity to repay obligations in
its local currency due to the sovereign government's own relatively lower
capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific
issues. Foreign currency issuer ratings are also distinguished from local
currency issuer ratings to identity those instances where sovereign risks
make them different for the same issuer.
DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of
economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic
stress.
BBB+/BBB Below-average protection factors but still considered
BBB- sufficient for prudent investment. Considerable variability
in risk during economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations
BB- when due. Present or prospective financial protection
factors fluctuate according to industry conditions. Overall
quality may move up or down frequently within this category.
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<PAGE>
B+/B/B- Below investment grade and possessing risk that obligation
will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
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FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case
of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.
This is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a
possibility of credit risk developing, particularly as the
result of adverse economic change over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Highly speculative. `B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A
`CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD,DD,D Default. The ratings of obligations in this category are
based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and
cannot be estimated with any precision, the following serve
as general guidelines. "DDD" obligations have the highest
potential for recovery, around 90%-100% of outstanding
amounts and accrued interest. "D" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or
all of their obligations. Entities rated "DDD" have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated
"DD" are likely to satisfy a higher portion of their
outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
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<PAGE>
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for
timely payment of financial commitments; may have an added
"+" to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term
adverse changes could result in a reduction to non-
investment grade.
B Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
COMPARATIVE BENCHMARKS
(alphabetically)
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics -- a statistical measure of change, over time in the price
of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange. It has been a widely followed indicator of the stock
market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New York
50
<PAGE>
Times, Personal Investor, The Wall Street Journal and Weisenberger Investment
Companies Service -- publications that rate fund performance over specified
time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-weighted
index maintained by the International Finance Corporation. This index
consists of over 890 companies in 26 emerging equity markets, and is designed
to measure more precisely the returns portfolio managers might receive from
investment in emerging markets equity securities by focusing on companies and
markets that are legally and practically accessible to foreign investors.
Lehman Brothers Indices:
------------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues, agency
issues, corporate bond issues and mortgage backed securities. It includes
fixed rate issuers of investment grade (BBB) or higher, with maturities of at
least one year and outstanding par values of at least $100 million for U.S.
government issues and $25 million for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate debt.
Also included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued
debt of U.S. government agencies and quasi-federal corporations, and corporate
debt guaranteed by the U.S. government). In addition to the aggregate index,
sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of
at least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded during
the month is held in the index until month end and then removed. All returns
are market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity and
an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with
12
51
<PAGE>
indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment objectives
were changed while other equity objectives remain unchanged. Changing
investment objectives include Capital Appreciation Funds, Growth Funds, Mid-
Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income Funds, and Equity
Income Funds. Unchanged investment objectives include Sector Equity Funds,
World Equity Funds, Mixed Equity Funds, and certain other funds including all
Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group;
2) number of component funds remains the same (30); 3) component funds are
defined annually; 4) can be linked historically; and 5) are used as a
benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but
are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt
issues (BBB or higher) with dollar-weighted average maturities of one to five
years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing 60%
or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by prospectus
or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to
grow significantly faster than the earnings of the stocks represented in the
major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions, exclusive
of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities
from 1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market value-
weighted averages of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
52
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Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
----------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of
the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000
Index.
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell
Top 200 companies with higher price-to-book ratios and higher forecasted
growth values. The stocks re also members of the Russell 1000 Growth
index.
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<PAGE>
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and does
not reflect any transaction costs. Direct investment in the index is not
possible.
Standard & Poor's U.S. Indices:
-------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10
economic sectors aggregated from 23 industry groups, 59 industries, and 123
sub-industries covering almost 6,000 companies globally. The new
classification standard will be used with all of their respective indices.
Features of the new classification include 10 economic sectors, rather than
the 11 S&P currently uses. Sector and industry gradations are less severe.
Rather than jumping from 11 sectors to 115 industries under the former S&P
system, the new system progresses from 10 sectors through 23 industry groups,
50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its market
value. It is used by over 95% of U.S. managers and pension plan sponsors. More
than $25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The
index is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred
benchmark for both active and passive management due to its low turnover and
greater liquidity. Approximately $8 billion is indexed to the S&P SmallCap
600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80%
of the securitized U.S. real estate market.
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S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including 23
electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
---------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
---------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as
the new Canadian large cap benchmark and will ultimately replace the Toronto
35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan --
are represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad
enough to provide representation of the market, but narrow enough to ensure
liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization)
of the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and inflation.
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Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used
by the institutional investment community as a broad measure of the
performance of public real estate equity for asset allocation and performance
comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The Sirach Portfolios
Sirach Growth Portfolio
Sirach Equity Portfolio
Sirach Special Equity Portfolio
Sirach Strategic Balanced Portfolio
Sirach Bond Portfolio
Institutional Class Shares
Institutional Service Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectuses of the portfolios
dated February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address
listed above.
<PAGE>
<TABLE>
Table Of Contents
<S> <C>
Description of Permitted Investments................................. 1
What Investment Strategies May the Portfolios Use?.................. 1
Debt Securities..................................................... 2
Derivatives......................................................... 9
Equity Securities................................................... 17
Foreign Securities.................................................. 18
Investment Companies................................................ 22
Repurchase Agreements............................................... 22
Restricted Securities............................................... 23
Securities Lending.................................................. 22
When Issued Transactions............................................ 23
Investment Policies of the Portfolios................................ 24
Fundamental Policies................................................ 24
Non-Fundamental Policies............................................ 25
Management Of The Fund............................................... 26
Principal Shareholders............................................... 27
Investment Advisory and Other Services............................... 30
Investment Adviser.................................................. 30
Distributor......................................................... 33
Service And Distribution Plans...................................... 33
Administrative Services............................................. 36
Custodian........................................................... 38
Independent Accountants............................................. 38
Brokerage Allocation and Other Practices............................. 38
Selection of Brokers................................................ 38
Simultaneous Transactions........................................... 38
Brokerage Commissions............................................... 38
Capital Stock and Other Securities................................... 39
Description Of Shares And Voting Rights............................. 39
Purchase, Redemption and Pricing of Shares........................... 41
Net Asset Value Per Share........................................... 41
Purchase of Shares.................................................. 41
Redemption of Shares................................................ 42
Exchange Privilege.................................................. 44
Transfer Of Shares.................................................. 44
Performance Calculations............................................. 44
Total Return........................................................ 45
Yield............................................................... 46
Comparisons......................................................... 46
Financial Statements................................................. 47
Glossary............................................................. 47
Bond Ratings......................................................... 48
Moody's Investors Service, Inc...................................... 48
Standard & Poor's Ratings Services.................................. 50
Duff & Phelps Credit Rating Co...................................... 53
Fitch IBCA Ratings.................................................. 54
Comparative Benchmarks............................................... 55
</TABLE>
<PAGE>
Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIOS USE?
- --------------------------------------------------------------------------------
The portfolios currently intend to use the securities and investment
strategies listed below in seeking their objectives; however, they may at any
time invest in any of the investment strategies described in this SAI. This
SAI describes each of these investments/strategies and their risks. A
portfolio may not notify shareholders before employing new strategies, unless
it expects such strategies to become principal strategies. The investments
that are italicized are principal strategies and you can find more information
on these techniques in the prospectus of the portfolio. You can find more
information concerning the limits on the ability of the portfolios to use
these investments in "What Are the Investment Policies of the Portfolios?"
Growth Portfolio
. Equity securities.
. Short-term investments.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Equity Portfolio
. Equity securities.
. Short-term investments.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Special Equity Portfolio
. Equity securities.
. Short-term investments.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
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Strategic Balanced Portfolio
. Equity securities.
. Debt securities.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Bond Portfolio
. Debt securities.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
- --------------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities, such
as zero-coupon bonds, do not pay current interest and are purchased at a
discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities include
treasury notes, which have initial maturities of one to ten years and treasury
bonds, which have initial maturities of at least ten years and certain types
of mortgage-backed securities that are described under "Mortgage-Backed
Securities" and "Other Asset-Backed Securities." This SAI discusses mortgage-
backed treasury and agency securities in detail in the section called
"Mortgage-Backed Securities" and "Other Asset-Backed Securities."
The full faith and credit of the U.S. government supports treasury securities.
Unlike treasury securities, the full faith and credit of the U.S. government
generally do not back agency securities. Agency securities are typically
supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
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. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the
credit risk is minimal. The U.S. government does not guarantee the net asset
value of the assets of a portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors,
the corporation promises to pay investors interest, and repay the principal
amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part or
all of the loan balance before maturity, the effective maturity of a mortgage-
backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The adviser will consider
such insurance and guarantees and the creditworthiness of the issuers thereof
in determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or guarantors will
not meet their obligations under the insurance policies or guarantee
arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of a
portfolio's shares. To buy GNMA securities, a portfolio may have to pay a
premium over the maturity value of the underlying mortgages, which the
portfolio may lose if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and
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credit unions and mortgage bankers. Securities issued by FNMA are agency
securities, which means FNMA, but not the U.S. government, guarantees their
timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these issuers
generally offer a higher rate of interest than pools created by GNMA, FNMA &
FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing a portfolio to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, a portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which allow debtors
to reduce their balances by offsetting certain amounts owed on the credit
cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such receivables to retain possession of
the underlying
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obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related asset-backed securities. Due to the quantity of
vehicles involved and requirements under state laws, asset-backed securities
backed by automobile receivables may not have a proper security interest in
all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
A portfolio may also invest in residual interests in asset-backed securities,
which is the excess cash flow remaining after making required payments on the
securities and paying related administrative expenses. The amount of residual
cash flow resulting from a particular issue of asset-backed securities depends
in part on the characteristics of the underlying assets, the coupon rates on
the securities, prevailing interest rates, the amount of administrative
expenses and the actual prepayment experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its assets
in the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a
short-term debt security has a maturity of one year or less.
Bank Obligations
A portfolio will only invest in a security issued by a commercial bank if the
bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However,
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there may be early withdrawal penalties depending upon market conditions and
the remaining maturity of the obligation. A portfolio may only purchase time
deposits maturing from two business days through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. A portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See "Bond Ratings" for a description
of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. Typically, one class will receive
some of the interest and most of the principal, while the other class will
receive most of the interest and the remaining principal. In extreme cases,
one class will receive all of the interest ("interest only" or "IO" class)
while the other class will receive the entire principal sensitive to the rate
of principal payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments may
adversely affect the yield to maturity of IOs. Slower than anticipated
prepayments of principal may adversely affect the yield to maturity of a PO.
The yields and market risk of interest only and principal only stripped
mortgage-backed securities, respectively, may be more volatile than those of
other fixed income securities, including traditional mortgage-backed
securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See
"FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold
at a discount from their face value. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. The amount of the
discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security
will have a longer duration than an ordinary debt security with the same
maturity. A portfolio's investments in pay-in-kind, delayed and zero coupon
bonds may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once
the holder of the security has stripped or separated corpus and coupons, it
may sell each component separately. The principal or corpus is then sold at a
deep
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discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold bundled in such form. The
underlying treasury security is held in book-entry form at the Federal Reserve
Bank or, in the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder thereof), in trust on behalf of
the owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," a portfolio can record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead, it
calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by a portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years --
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
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Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. A
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of a portfolio. If
left unattended, drifts in the average maturity of a portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of a portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation for
assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and complete
repayment of principal is less certain. The credit rating or financial
condition of an issuer may affect the value of a debt security. Generally,
the lower the quality rating of a security, the greater the risks that the
issuer will fail to pay interest and return principal. To compensate investors
for taking on increased risk, issuers with lower credit ratings usually offer
their investors a higher "risk premium" in the form of higher interest rates
above comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an adjustment
to this "risk premium." Since an issuer's outstanding debt carries a fixed
coupon, adjustments to the risk premium must occur in the price, which effects
the yield to maturity of the bond. If an issuer defaults or becomes unable to
honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause a portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
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Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's opinion,
not an absolute standard of quality, and they do not reflect an evaluation of
market risk. The section "Bond Ratings" contains further information
concerning the ratings of certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time a portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. A portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner, to
reduce transaction costs or to remain fully invested. They may also invest in
derivatives to protect it from broad fluctuations in market prices, interest
rates or foreign currency exchange rates. Investing in derivatives for these
purposes is known as "hedging." When hedging is successful, the portfolio will
have offset any depreciation in the value of its portfolio securities by the
appreciation in the value of the derivative position. Although techniques
other than the sale and purchase of derivatives could be used to control the
exposure of the portfolio to market fluctuations, the use of derivatives may
be a more effective means of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party sells
and the other party agrees to buy a specified amount of a financial instrument
at an agreed upon price and time. The financial instrument underlying the
contract may be a stock, stock index, bond, bond index, interest rate, foreign
exchange rate or other similar instrument. Agreeing to buy the underlying
financial information is called buying a futures contract or taking a long
position in the contract. Likewise, agreeing to sell the underlying financial
instrument is called selling a futures contract or taking a short position in
the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit "initial margin" with a futures broker, known as a futures commission
merchant, when they enter into the contract. Initial margin deposits are
typically equal to a percentage of the contract's value. After they open a
futures contract, the parties to the transaction must compare the purchase
price of the contract to its daily market value. If the value of the futures
contract changes in such a way that a party's position declines, that party
must make additional "variation margin" payments so that the margin payment is
adequate. On the other hand, the value of the contract may change in such a
way that there is excess margin on deposit, possibly entitling the party that
has a gain to receive all or a portion of this amount. This process is known
as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the sale price upon closing out the contract is less than the
original purchase price, the person closing out the contract will realize a
loss. If the sale price upon closing out the contract is more that the
original purchase price, the person closing out the contract will realize a
gain. The opposite is also true. If the purchase price upon closing out the
contract is more than the original sale price, the person closing
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out the contract will realize a loss. If the purchase price upon closing out
the contract is less than the original sale price, the person closing out the
contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the exercise price
plus the premium paid and related transaction costs. Otherwise, the portfolio
would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any
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time before the expiration date. The portfolio may terminate its position in
an exchange-traded put option before exercise by buying an option identical to
the one it has written. Similarly, it may cancel an over-the-counter option by
entering into an offsetting transaction with the counter-party to the
option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put option
to expire and the premium it received to offset the increase in the security's
value. If security prices remain the same over time, the portfolio would hope
to profit by closing out the put option at a lower price. If security prices
fall, the portfolio may lose an amount of money equal to the difference
between the value of the security and the premium it received. Writing covered
put options may deprive the portfolio of the opportunity to profit from a
decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract
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market clearing house establishes a corresponding short position for the
writer of the option (in the case of a call option) or a corresponding long
position (in the case of a put option). If the option is exercised, the
parties will be subject to the futures contracts. In addition, the writer of
an option on a futures contract is subject to initial and variation margin
requirements on the option position. Options on futures contracts are traded
on the same contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead
of selling or buying futures contracts. The portfolio may buy a put option on
a futures contract for the same reasons it would sell a futures contract. It
also may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures
contracts, such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the portfolio would retain the option premium, which would offset, in part,
any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if the market price declines, the
portfolio would pay more than the market price for the underlying instrument.
The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded only on exchanges regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
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Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing rates,
security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the portfolio,
the portfolio must be prepared to make such payments when due. In addition, if
the counter-party's creditworthiness declined, the value of a swap agreement
would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and
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can be transferred by a party only with the prior written consent of the other
party. The portfolio may be able to eliminate its exposure under a swap
agreement either by assignment or by other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly creditworthy
party. If the counter-party is unable to meet its obligations under the
contract, declares bankruptcy, defaults or becomes insolvent, the portfolio
may not be able to recover the money it expected to receive under the
contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the SEC. If the portfolio enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the portfolio's accrued obligations under the
swap agreement over the accrued amount the portfolio is entitled to receive
under the agreement. If the portfolio enters into a swap agreement on other
than a net basis, it will segregate assets with a value equal to the full
amount of the portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of interest
rate cash flow on specified dates in the future. Some of the different types
of interest rate swaps are "fixed-for floating rate swaps," "termed basis
swaps" and "index amortizing swaps." Fixed-for floating rate swap involve the
exchange of fixed interest rate cash flows for floating rate cash flows.
Termed basis swaps entail cash flows to both parties based on floating
interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the portfolio enters into a swap where it agrees to exchange a
floating rate of interest for a fixed rate of interest, the portfolio may have
to pay more money than it receives. Similarly, if the portfolio enters into a
swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the portfolio may receive less money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in which
one party agrees to make interest rate payments in one currency and the other
promises to make interest rate payments in another currency. A portfolio may
enter into a currency swap when it has one currency and desires a different
currency. Typically the interest rates that determine the currency swap
payments are fixed, although occasionally one or both parties may pay a
floating rate of interest. Unlike an interest rate swap, however, the
principal amounts are exchanged at the beginning of the contract and returned
at the end of the contract. Changes in foreign exchange rates and changes in
interest rates, as described above may negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the portfolio than if it had not entered into
any derivatives transactions. Derivatives may magnify the portfolio's gains or
losses, causing it to make or lose substantially more than it invested.
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When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities the portfolio is hedging may not move
in the same amount, or even in the same direction as the hedging instrument.
The adviser will try to minimize this risk by investing only in those
contracts whose behavior it expects to resemble the portfolio securities it is
trying to hedge. However, if the portfolio's prediction of interest and
currency rates, market value, volatility or other economic factors is
incorrect, the portfolio may lose money, or may not make as much money as it
expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
. current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
. differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on
a broad market index. Since narrower indices are made up of a smaller number
of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration in
the issuer's creditworthiness. Because the value of the portfolio's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the portfolio's investments precisely over
time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange
the contract was initially traded. Although a portfolio intends to purchase
options and futures only where there appears to be an active market, there is
no guarantee that such a liquid market will exist. If there is no secondary
market for the contract, or the market is illiquid, the portfolio may not be
able to close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
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. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage firm
or clearing house or other occurrences may disrupt normal trading activity;
or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, a portfolio may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative prices have
occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
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EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life, usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued
together with a debt security or preferred stock and that give the holder the
right to buy proportionate amount of common stock at a specified price.
Warrants are freely transferable and are traded on major exchanges. Unlike
rights, warrants normally have a life that is measured in years and entitles
the holder to buy common stock of a company at a price that is usually higher
than the market price at the time the warrant is issued. Corporations often
issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed
17
<PAGE>
by common stockholders in order of priority, are entitled only to the residual
amount after a company meets its other obligations. For this reason, the value
of a company's stock will usually react more strongly to actual or perceived
changes in the company's financial condition or prospects than its debt
obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of
their small or medium size, limited markets and financial resources, narrow
product lines and frequent lack of management depth. The securities of small
and medium companies are often traded in the over-the-counter market and might
not be traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
- --------------------------------------------------------------------------------
Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding
18
<PAGE>
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities. EDRs are
similar to ADRs, except that they are typically issued by European Banks or
trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. Investments in these investment funds are subject to the
provisions of the 1940 Act. Shareholders of a UAM Fund that invests in such
investment funds will bear not only their proportionate share of the expenses
of the UAM Fund (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in foreign
securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments
19
<PAGE>
in its securities markets. These restrictions could limit the portfolio's
ability to invest in a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or companies
in which a foreigner can invest. Other countries may restrict the ability
of foreign investors to repatriate their investment income and capital
gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the
United States dollar will result in a corresponding change in value of
securities denominated in that currency. Some of the factors that may impair
the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
.
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<PAGE>
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover
a portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that adopt the Euro
in all aspects of the investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custody and accounting. Some of the
uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
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<PAGE>
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- -------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by a portfolio. Like other shareholders, each portfolio
would pay its proportionate share of those fees. Consequently, shareholders of
a portfolio would pay not only the management fees of the portfolio, but also
the management fees of the investment company in which the portfolio invests.
A portfolio may invest up to 10% of its total assets in the securities of
other investment companies, but may not invest more than 5% of its total
assets in the securities of any one investment company or acquire more than 3%
of the outstanding securities of any one investment company.
The SEC has granted an order that allows a portfolio to invest the greater of
5% of its total assets or $2.5 million in the UAM DSI Money Market Portfolio,
provided that the investment is:
. For cash management purposes;
. Consistent with a portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
- -------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When a portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, a portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before a portfolio can sell it and a portfolio might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
- -------------------------------------------------------------------------------
The portfolios may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of these
securities could be more or less than those originally paid by a portfolio or
less than what may be considered the fair value of such securities.
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<PAGE>
SECURITIES LENDING
- --------------------------------------------------------------------------------
A portfolio may lend a portion of its total assets to broker- dealers or other
financial institutions. It may then reinvest the collateral it receives in
short-term securities and money market funds. When a portfolio lends its
securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U.S.
government;
. The borrower must add to the collateral whenever the price of the securities
loaned rises (i.e., the borrower "marks to the market" on a daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- -------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, a
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future. In
each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or deliver securities
until a later date. Typically, no income accrues on securities a portfolio has
committed to purchase before the securities are delivered, although the
portfolio may earn income on securities it has in a segregated account. A
portfolio will only enter into these types of transactions with the intention
of actually acquiring the securities, but may sell them before the settlement
date.
A portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When a portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, a
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because a portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
A portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. A portfolio will segregate additional liquid assets daily so that
the value of such assets is equal to the amount of its commitments.
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<PAGE>
Investment Policies of the Portfolios
- -------------------------------------------------------------------------------
A portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, a
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
FUNDAMENTAL POLICIES
- -------------------------------------------------------------------------------
The following investment limitations are fundamental, which means a portfolio
cannot change them without approval by the vote of a majority of the
outstanding voting securities of the portfolio, as defined by the 1940 Act.
Strategic Balanced, Growth, Equity and Bond Portfolios
The portfolios will not:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the
government of the U.S. or any agency or instrumentality thereof).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 33 1/3% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1) making any
permitted borrowings, mortgages or pledges, or (2) entering repurchase
transactions.
. Make loans except (i) by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
subject to the limitation described below and (ii) by lending its portfolio
securities to banks, brokers, dealers, and other financial institutions so
long as such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the SEC thereunder.
. Purchase or sell real estate or real estate limited partnerships, although
it may purchase or sell securities of companies which deal in real estate
and may purchase and sell securities which are secured by interests in real
estate.
. Underwrite the securities of other issuers.
Special Equity Portfolio
The portfolio will not:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the
government of the U.S. or any agency or instrumentality thereof).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 10% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest for the purpose of exercising control over management of any
company.
24
<PAGE>
. Invest in physical commodities or contracts on physical commodities.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
. Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. Invest more than an aggregate of 10% of the net assets of the portfolio,
determined at the time of investment, in securities subject to legal or
contractual restrictions on resale or securities for which there are no
readily available markets, including repurchase agreements having
maturities of more than seven days.
. Issue senior securities, as defined in the 1940 Act except that this
restriction shall not be deemed to prohibit a portfolio from (1) making any
permitted borrowings, mortgages or pledges, or (2) entering repurchase
transactions.
. Make loans except (i) by purchasing debt securities in accordance with its
investment objectives and policies, or entering into repurchase agreements,
subject to the limitation described below and (ii) by lending its portfolio
securities to banks, brokers, dealers, and other financial institutions so
long as such loans are not inconsistent with the 1940 Act or the Rules and
Regulations or interpretations of the Commission thereunder.
. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total assets.
. Purchase on margin or sell short.
. Purchase or retain securities of an issuer if those officers and board
members or its investment adviser owning more than 1/2 1/2 of 1% of such
securities together own more than 5% of such securities.
. Purchase or sell real estate or real estate limited partnerships, although
it may purchase or sell securities of companies which deal in real estate
and may purchase and sell securities which are secured by interests in real
estate.
. Underwrite the securities of other issuers.
NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means a portfolio may
change them without shareholder approval.
Strategic Balanced, Growth, Equity and Bond Portfolios
The portfolios will not:
. invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. invest more than an aggregate of 15% of the net assets of the portfolio,
determined at the time of investment, in securities subject to legal or
contractual restrictions on resale or securities for which there are no
readily available markets, including repurchase agreements having
maturities of more than seven days.
. pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% (33 1/3% for the Sirach Bond Portfolio) of its total assets at
fair market value.
. purchase additional securities when borrowings exceed 5% of total assets.
. purchase on margin or sell short.
Strategic Balanced and Bond Portfolios
The portfolios will not:
25
<PAGE>
. invest in stock or bond futures and/or options on futures unless (1) not
more than 5% of the portfolio's assets are required as deposit to secure
obligations under such futures and/or options on futures contracts
provided; and (2) not more than 20% of the portfolio's assets are invested
in stock or bond futures and options on futures.
Sirach Bond Portfolio
The portfolio will not:
. invest more than 10% of the portfolio's assets in any single non-
governmental issue.
In addition, the adviser intends to limit the Bond Portfolio's investments to
investment grade securities; however, the adviser reserves the right to retain
securities which are rated Ba or B by Moody's or BB or B by S&P if, in the
adviser's judgement, maintaining a position in the securities is warranted.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to execute
policies the board has formulated. The Fund pays each board member who is not
also an officer or affiliated person (independent board member) a $150
quarterly retainer fee per active portfolio and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and
other expenses incurred while attending board meetings. The $2,000 meeting fee
and expense reimbursements are aggregated for all of the board members and
allocated proportionately among the portfolios of the UAM Funds Complex. The
Fund does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from the
UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act. Mr.
English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in the
UAM Funds Complex. However, the Fund does not believe that the relationship is
a material business relationship, and, therefore, does not consider him to be
an "interested person" of the Fund. If these circumstances change, the Board
will determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
From the Fund Complex as of
Name, Address, Position Principal Occupations During the as of October October 31,
DOB with Fund Past 5 years 31, 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management $7,137 $10,625
College Road -- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company, Inc.; President of Bennett Management
1/26/29 Company from 1988 to 1993.
- ---------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund since $7,137 $10,625
1250 24/th/ St., NW Member January 1999; Vice President for Finance and
Washington, DC 20037 Administration and Treasurer of Radcliffe College
8/14/51 from 1991 to 1999.
- ----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief Administrative $7,137 $10,625
100 King Street West Member Officer of Philip Services Corp.; Formerly, a Partner
P.O. Box 2440, LCD-1 in the Philadelphia office of the law firm Dechert
Hamilton Ontario, Price & Rhoads and a Director of Hofler Corp.
Canada L8N-4J6
4/21/42
- ----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of Broventure $7,137 $10,625
16 West Madison Street Member Company, Inc.; Chairman of the Board of Chektec
Baltimore, MD 21201 Corporation and Cyber Scientific, Inc.
8/5/48
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
From the Fund Complex as of
Name, Address, Position Principal Occupations During the as of October October 31,
DOB with Fund Past 5 years 31, 1999 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James P. Pappas* Board President of UAM Investment Services, Inc. since 0 0
211 Congress Street Member March 1999; Vice President UAM Trust Company since
Boston, MA 02110 January 1996; Principal of UAM Fund Distributors,
2/24/53 Inc. since December 1995; Vice President of UAM
Investment Services, Inc. from January 1996 to March
1999 and a Director and Chief Operating Officer of CS
First Boston Investment Management from 1993-1995.
- ---------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director of 0 0
One International Place Member; United Asset Management Corporation; Director,
Boston, MA 02110 and President Partner or Trustee of each of the
3/21/35 Chairman Investment Companies of the Eaton Vance Group of
Mutual Funds.
- ----------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of Dewey 0 0
One Financial Center Member Square Investors Corporation since 1988; Director and
Boston, MA 02111 Chief Executive Officer of H.T. Investors, Inc.,
7/1/43 formerly a subsidiary of Dewey Square.
- ----------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial Officer 0 0
One International Place President of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- ----------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of the 0 0
211 Congress Street Fidelity Group of Mutual Funds from 1991 to 1995;
Boston, MA 02110 held various other offices with Fidelity Investments
7/4/51 from November 1990 to March 1995.
- ----------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase Global Fund
Boston, MA 02110 Services Company from 1995 to 1996; Senior Manager of
9/18/63 Deloitte & Touche LLP from 1985 to 1995,
- ----------------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI Investments; 0 0
SEI Investments Treasurer Senior Manager at Arthur Andersen prior to 1994.
One Freedom Valley Rd.
Oaks, PA 19456
12/17/63
</TABLE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Name and Address of Percentage of Shares
Shareholder Owned Portfolio Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UMBSC & CO. 31.64% Sirach Bond Institutional
FBO Interstate Brands Portfolio Class Shares
Conservative Growth
PO Box 419260
Kansas City, MO 64141-6260
- -----------------------------------------------------------------------------------------------------------------------
Charles Schwab & CO INC. 11.42% Sirach Bond Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94101-4122
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Percentage of Shares
Shareholder Owned Portfolio Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wendel & Co. 7.46% Sirach Bond Institutional
FBO AAA Portfolio Class Shares
PO Box 1006
New York, NY 10286-0001
- -----------------------------------------------------------------------------------------------------------------------
Wilmington Trust CO TR 6.86% Sirach Bond Institutional
U/A 4/01/1998 FBO IBT 401K Portfolio Class Shares
c/o Mutual Funds UAM
PO Box 8971
Wilmington, DE 19899-8971
- -----------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 6.32% Sirach Bond Institutional
FBO Interstate Brands Portfolio Class Shares
Moderate Growth
PO Box 419260
Kansas City, MO 64141-6260
- -----------------------------------------------------------------------------------------------------------------------
Northwestern Trust Co. 6.21% Sirach Bond Institutional
1201 3rd Avenue, Suite 2010 Portfolio Class Shares
Seattle, WA 98101-3026
- -----------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co. TR 99.99% Sirach Bond Institutional
FBO Catholic Healthcare West Med Portfolio Service Class
c/o Mutual Funds Shares
PO Box 8971
Wilmington, DE 19899-8971
- -----------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 16.12% Sirach Equity Institutional
FBO Interstate Brands Portfolio Class Shares
Aggressive Growth
PO Box 419175
Kansas City, MO 64141-6175
- -----------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 14.35% Sirach Equity Institutional
FBO Interstate Brands Portfolio Class Shares
Conservative Growth
PO Box 419175
Kansas City, MO 64141-6175
- -----------------------------------------------------------------------------------------------------------------------
Lutsey Family Foundation, Inc. 13.21% Sirach Equity Institutional
PO Box 22074 Portfolio Class Shares
Green Bay, WI 54305-2074
- -----------------------------------------------------------------------------------------------------------------------
Key Trust Company - PRISM 11.91% Sirach Equity Institutional
Lane Powell, LLP PSP Portfolio Class Shares
4900 Tiedeman Road
Brooklyn, OH 44144-23338
- -----------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 9.92% Sirach Equity Institutional
FBO Interstate Brands Portfolio Class Shares
Moderate Growth
P.O. Box 419175
Kansas City, MO 64141-6175
- -----------------------------------------------------------------------------------------------------------------------
US Bank National Association TR 7.07% Sirach Equity Institutional
FBO Icicle Sea Foods ESOP Sirach Portfolio Class Shares
PO Box 64010
Saint Paul, MN 55164-0010
- -----------------------------------------------------------------------------------------------------------------------
SO Alaska Defined 26.48% Sirach Growth Institutional
Contribution Pension Plan Portfolio Class Shares
Attn: Carol Patton
PO Box 241266
Anchorage, AK 99524-1266
- -----------------------------------------------------------------------------------------------------------------------
NFSC FEBO 21.11% Sirach Growth Institutional
First Interstate Bank Financial Svcs. D Portfolio Class Shares
Cash Account
PO Box 30918
Billings, MT 59116-0918
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Percentage of Shares
Shareholder Owned Portfolio Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wilmington Trust Co. TR 8.84% Sirach Growth Institutional
FBO IBT 401K Portfolio Class Shares
Profit Sharing Plan
c/o Mutual Funds UAM
P.O. Box 8971
Wilmington, DE 19899-8971
- -----------------------------------------------------------------------------------------------------------------------
William M. Connor CUST 7.20% Sirach Growth Institutional
Connor Development CO Portfolio Class Shares
Profit Sharing Plan
846 108/th/ Ave NW
Bellevue, WA 98004-4304
- -----------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co. TR 5.87% Sirach Growth Institutional
FBO Cherokee Nation 401K Plan Portfolio Class Shares
c/o Mutual Funds UAM
PO Box 8971
Wilmington, DE 19899-8971
- -----------------------------------------------------------------------------------------------------------------------
UAM Trust Company CUST 5.29% Sirach Growth Institutional
IRA A/C William M. Conner Portfolio Class Shares
846 108/th/ NE
Bellevue, WA 98004-4304
- -----------------------------------------------------------------------------------------------------------------------
Wilmington Trust CO TR 94.59% Sirach Growth Institutional
FBO Allied Waste 401K Plan Portfolio Service Class
c/o Mutual Funds UAM Shares
1100 N. Market Street
Wilmington, DE 19890-0001
- -----------------------------------------------------------------------------------------------------------------------
Bank of New York CUST 16.23% Sirach Special Institutional
Two Union Square Equity Portfolio Class Shares
Automotive Machinists
601 Union Street, Suite 520
Seattle, WA 98101-2328
- -----------------------------------------------------------------------------------------------------------------------
Wells Fargo Bank NA 6.95% Sirach Special Institutional
FBO Hanford Oper. & Engineering Equity Portfolio Class Shares
Pension Plan
PO Box 9800
Calabasas, CA 91372-0800
- -----------------------------------------------------------------------------------------------------------------------
Northern Trust Company CUST 5.73% Sirach Special Institutional
FBO Navajo Nation Equity Portfolio Class Shares
PO Box 92956
Chicago, IL 60675-2956
- -----------------------------------------------------------------------------------------------------------------------
Dingle & CO 5.34% Sirach Special Institutional
c/o Comerica Bank Mutual Funds Equity Portfolio Class Shares
Operating Engineers 324 Pension Fund
PO Box 75000
Detroit, MI 48275-0001
- -----------------------------------------------------------------------------------------------------------------------
South Bay Hotel Employee & 13.31% Sirach Strategic Institutional
Restaurant EE Pension Plan Balanced Class Shares
c/o United Admin Services Portfolio
PO Box 5057
San Jose, CA 95150-5057
- -----------------------------------------------------------------------------------------------------------------------
Alaska Bricklayers Retirement Plan 12.71% Sirach Strategic Institutional
407 Denali Street Balanced Class Shares
Anchorage, AK 99501-2615 Portfolio
- -----------------------------------------------------------------------------------------------------------------------
SO Alaska Defined 8.64% Sirach Strategic Institutional
Contribution Pension Plan Balanced Class Shares
P.O. Box 241266 Portfolio
Anchorage, AK 99524-1266
- -----------------------------------------------------------------------------------------------------------------------
Montgomery & Purdue & Blankinship 8.27% Sirach Strategic Institutional
& Austinn TR Balanced Class Shares
Money Purchase Pension Plan Portfolio
701 5th Avenue
Seattle, WA 98104-7097
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Percentage of Shares
Shareholder Owned Portfolio Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Norwest Bank Colorado 6.68% Sirach Strategic Institutional
FBO Agrium Defined Benefit Balanced Class Shares
Retirement Plan Portfolio
Agrium U.S. Inc.
1740 Broadway
Denver, CO 80274-0001
- -----------------------------------------------------------------------------------------------------------------------
NANA Regional Corporation Inc. 5.15% Sirach Strategic Institutional
Employees Pension Plan Balanced Class Shares
1001 E. Benson Blvd. Portfolio
Anchorage, AK 99508-4256
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares of
a portfolio may be presumed to "control" (as that term is defined in the 1940
Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio. As of February 1, 2000,
the directors and officers of the Fund owned less than 1% of the outstanding
shares of the portfolios.
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Sirach Capital Management, Inc., located at 3323 One Union Square, Seattle,
Washington 98101, is the investment adviser to each of the portfolios. The
adviser manages and supervises the investment of each portfolio's assets on a
discretionary basis. The adviser, an affiliate of United Asset Management
Corporation, has provided investment management services to corporations,
pension and profit sharing plans, 401(k) and thrift plans, trusts, estates and
other institutions and individuals since 1970.
The adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds Complex.
Portfolio Management
Teams of investment professionals are primarily responsible for the day-to-day
management of the portfolios. Listed below are the investment professionals
that comprise those teams and a brief description of their business
experience.
Growth and Equity Portfolios
The adviser's Equity Management Team manages the Growth and Equity Portfolios.
Listed below are the members of that team and a brief description of their
business experience.
<TABLE>
<CAPTION>
Name & Title Experience
- --------------------------------------------------------------------------------
<S> <C>
Harvey G. Bateman Mr. Bateman joined the adviser in 1988 as a
Principal/Portfolio Manager Principal/Portfolio Manager, where he has
managed equity accounts since 1989.
</TABLE>
30
<PAGE>
Name & Title Experience
- --------------------------------------------------------------------------------
Sharon Rowley, CFA Ms. Rowley joined the adviser in 1998 as a
Principal/Portfolio Manager Principal/Portfolio Manager. Before that she was a
Principal at Seafirst Investment Counselors where
she managed equity, bond and balanced accounts for
high net worth individuals and institutional
clients.
- --------------------------------------------------------------------------------
Karin L. Gibony Ms. Gibony joined the adviser in 1990. She has
Principal/Portfolio Manager managed equity and balanced funds for Sirach
Capital Management since 1991.
- --------------------------------------------------------------------------------
James P. Kieburtz Mr. Kieburtz joined the adviser in 1994. Before
Principal/Portfolio Manager that, he was a Systems Engineer specializing in
financial account applications at the accounting
firm of Hagen, Kurth & Perman.
Special Equity Portfolio
The adviser's Small Cap Equity Management Team manages the Special Equity
Portfolio. Listed below are the members of that team and a brief description of
their business experience.
Name & Title Experience
- --------------------------------------------------------------------------------
Harvey G. Bateman You may find Mr. Bateman's biography under Equity
Principal/Portfolio Manager Management Team above.
- --------------------------------------------------------------------------------
James P. Kieburtz You may find Mr. Kieburtz's biography under
Principal/Portfolio Manager Equity Management Team above.
- --------------------------------------------------------------------------------
Bond Portfolio
The adviser's Fixed Income Management Team manages the Bond Portfolio. Listed
below are the members of that team and a brief description of their business
experience.
Name & Title Experience
- --------------------------------------------------------------------------------
Craig F. Hintze Mr. Hintze joined the adviser in 1996 as a
Principal/Portfolio Manager Principal/Portfolio Manager when Olympic Capital
Management merged with Sirach Capital Management.
Before the merger, he was a Principal of Olympic
Capital Management where he had managed fixed-
income portfolios for institutional clients since
1982.
- --------------------------------------------------------------------------------
John F. Dagres Mr. Dagres joined the adviser in 1996 as a
Principal/Portfolio Manager Principal/Portfolio Manager when Olympic Capital
Management merged with Sirach Capital Management.
Before the merger, he was a Principal of Olympic
Capital Management where he had managed fixed
income portfolios for institutional clients since
1982.
- --------------------------------------------------------------------------------
Stephen J. Romano Mr. Romano joined the adviser in 1991 as a
Principal/Portfolio Manager Principal/Portfolio Manager. Before that, he was a
Senior Investment Officer at Seattle-First
National Bank where he managed equity and fixed
income portfolios for private banking
clients.
Larry J. Katz Mr. Katz joined the adviser in 1996 as a
Principal/Portfolio Manager Principal/Portfolio Manager. Before that, he was a
Senior Analyst at Frank Russell Company from 1994
until 1996, an independent consultant during 1993
and a Senior Portfolio Manager at Puget Sound
Savings Bank from 1984 through 1992.
Strategic Balanced Portfolio
The adviser's Equity Management Team manages the equity portion of the Strategic
Balanced Portfolio and the adviser's Fixed Income Management Team manages the
debt portion of the portfolio. You can find the composition of the teams and the
biographies of their members under the appropriate heading above.
31
<PAGE>
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Fund has filed each agreement with the SEC as part
of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of a portfolio's assets;
. Continuously reviews, supervises and administers the investment program of a
portfolio; and
. Determines what portion of a portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Investment Advisory Agreement, (2) reckless disregard by the adviser of
its obligations and duties under the Investment Advisory Agreement, or (3) a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Board Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
32
<PAGE>
Advisory Fees
For its services, each portfolio pays its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of the
portfolio. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that a portfolio pays in any given year may
be different from the rate set forth in its contract with the adviser. For
the last three fiscal years, the portfolios paid the following in management
fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Investment Advisory Fees Total Investment Advisory
Paid Waived Fees
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio
1999 $ 571,110 $ 0 $ 571,110
---------------------------------------------------------------------------------------------------------------------------------
1998 $ 942,815 $ 0 $ 942,815
---------------------------------------------------------------------------------------------------------------------------------
1997 $ 981,338 $ 0 $ 981,338
---------------------------------------------------------------------------------------------------------------------------------
Equity Portfolio
1999 $ 294,707 $155,576 $ 139,131
---------------------------------------------------------------------------------------------------------------------------------
1998 $ 129,597 $105,815 $ 23,782
---------------------------------------------------------------------------------------------------------------------------------
1997 $ 18,699 $ 82,349 $ 0
---------------------------------------------------------------------------------------------------------------------------------
Special Equity Portfolio
1999 $1,177,517 $ 0 $1,177,517
---------------------------------------------------------------------------------------------------------------------------------
1998 $1,849,841 $ 0 $1,849,841
---------------------------------------------------------------------------------------------------------------------------------
1997 $2,768,336 $ 0 $2,768,336
---------------------------------------------------------------------------------------------------------------------------------
Strategic Balanced Portfolio
1999 $ 508,834 $ 0 $ 508,834
---------------------------------------------------------------------------------------------------------------------------------
1998 $ 560,700 $ 0 $ 560,700
---------------------------------------------------------------------------------------------------------------------------------
1997 $ 550,068 $ 0 $ 550,068
---------------------------------------------------------------------------------------------------------------------------------
Bond Portfolio
1999 $ 0 $243,816 $ 0
---------------------------------------------------------------------------------------------------------------------------------
1998 $ 0 $182,632 $ 0
---------------------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
</TABLE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services, and any amounts it may receive under a Service
and Distribution Plan are passed through in their entirety to third parties.
UAMFDI, an affiliate of UAM, is located at 211 Congress Street, Boston,
Massachusetts 02110.
SERVICE AND DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan (the
"Plans") for the portfolios' Institutional Service Class Shares pursuant to
Rule 12b-1 under the 1940 Act.
Shareholder Servicing Plan
The Shareholder Servicing Plan (Service Plan) permits the Fund to compensate
broker-dealers or other financial institutions (Service Agents) that have
agreed with UAMFDI to provide administrative support services to Institutional
Service Class shareholders that are their customers. Under the Service Plan,
Institutional Service Class Shares may pay service fees at the maximum annual
rate of 0.25 of the average daily net asset value of such shares held by the
Service Agent for the benefit of its customers. The Fund pays these fees out
of the assets allocable to a portfolio's Institutional Service Class Shares
to UAMFDI, to the Service Agent directly or through UAMFDI. Each item
for which a payment may be made under the Service Plan constitutes personal
service and/or shareholder account maintenance and may constitute an expense
of distributing Institutional Service Class
33
<PAGE>
Shares as the SEC construes such term under Rule 12b-1. Services for which
Institutional Service Class Shares may compensate Service Agents include:
. Acting as the sole shareholder of record and nominee for beneficial owners.
. Maintaining account records for such beneficial owners of the Fund's
shares.
. Opening and closing accounts.
. Answering questions and handling correspondence from shareholders about
their accounts.
. Processing shareholder orders to purchase, redeem and exchange shares.
. Handling the transmission of funds representing the purchase price or
redemption proceeds.
. Issuing confirmations for transactions in the Fund's shares by
shareholders.
. Distributing current copies of prospectuses, statements of additional
information and shareholder reports.
. Assisting customers in completing application forms, selecting dividend and
other account options and opening any necessary custody accounts.
. Providing account maintenance and accounting support for all transactions.
. Performing such additional shareholder services as may be agreed upon by
the Fund and the Service Agent, provided that any such additional
shareholder services must constitute a permissible non-banking activity in
accordance with the then current regulations of, and interpretations
thereof by, the Board of Governors of the Federal Reserve System, if
applicable.
Rule 12b-1 Distribution Plan
The Distribution Plan permits a portfolio to pay UAMFDI or others for certain
distribution, promotional and related expenses involved in marketing its
Institutional Service Class Shares. Under the Distribution Plan, Institutional
Service Class Shares may pay distribution fees at the maximum annual rate of
0.75% of the average daily net asset value of such shares held by the Service
Agent for the benefit of its customers. These expenses include, among other
things:
. Advertising the availability of services and products.
. Designing materials to send to customers and developing methods of making
such materials accessible to customers.
. Providing information about the product needs of customers.
. Providing facilities to solicit Fund sales and to answer questions from
prospective and existing investors about the Fund.
. Receiving and answering correspondence from prospective investors,
including requests for sales literature, prospectuses and statements of
additional information.
. Displaying and making available sales literature and prospectuses.
. Acting as liaison between shareholders and the Fund, including obtaining
information from the Fund and providing performance and other information
about the Fund.
In addition, the Institutional Service Class Shares may make payments directly
to other unaffiliated parties, who either aid in the distribution of their
shares or provide services to the Class.
Fees Paid under the Service and Distribution Plans
The Plans permit Institutional Service Class shares to pay distribution and
service fees at the maximum annual rate of 1.00% of the class' average daily
net assets for the year. The Fund's governing board has limited the amount
the Institutional Service Class may pay under the Plans to 0.25% of the class'
average daily net assets for the year, and may increase such amount to the
plan maximum at any time.
34
<PAGE>
The Fund will not reimburse the Distributor or others for distribution
expenses incurred in excess of the amount permitted by the Plans.
Subject to seeking best price and execution, the Fund may buy or sell
portfolio securities through firms that receive payments under the Plans.
UAMFDI, at its own expense, may pay dealers for aid in distribution or for aid
in providing administrative services to shareholders.
<TABLE>
<CAPTION>
Distribution Plan Expenses
-----------------------------------------------------------------------
<S> <C>
Growth Portfolio $34,812
1999
-----------------------------------------------------------------------
Bond Portfolio $ 3,032
1999
</TABLE>
Approving, Amending and Terminating the Fund's Distribution Arrangements
Shareholders of each portfolio have approved the Plans. The Plans also were
approved by the governing board of the Fund, including a majority of the
members of the board who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plans (Plan
Members), by votes cast in person at meetings called for the purpose of voting
on these Plans.
Continuing the Plans
The Plans continue in effect from year to year so long as they are approved
annually by a majority of the Fund's board members and its Plan Members. To
continue the Plans, the board must determine whether such continuation is in
the best interest of the Institutional Service Class shareholders and that
there is a reasonable likelihood of the Plans providing a benefit to the
Class. The Fund's board has determined that the Fund's distribution
arrangements are likely to benefit the Fund and its shareholders by enhancing
the Fund's ability to efficiently service the accounts of its Institutional
Service Class shareholders.
Amending the Plans
A majority of the Fund's governing board and a majority of its the Plan
Members must approve any material amendment to the Plans. Likewise, any
amendment materially increasing the maximum percentage payable under the Plans
must be approved by a majority of the outstanding voting securities of the
Class, as well as by a majority of the Plan Members.
Terminating the Plans
A majority of the Plan Members or a majority of the outstanding voting
securities of the Class may terminate the Plans at any time without penalty.
In addition, the Plans will terminate automatically upon their assignment.
Miscellaneous
So long as the Plans are in effect, the non-interested board members will
select and nominate the Plan Members of the Fund.
The Fund and UAMFDI intend to comply with the Conduct Rules of the National
Association of Securities Dealers relating to investment company sales
charges. with these rules.
Pursuant to the Plans, the board reviews, at least quarterly, a written report
of the amounts expended under each agreement with Service Agents and the
purposes for which the expenditures were made.
Additional Non-12b-1 Shareholder Servicing Arrangements
In addition to payments by the Fund under the Plans, UAM and any of its
affiliates, may, at its own expense, compensate a Service Agent or other
person for marketing, shareholder servicing, record-keeping and/or other
services performed with respect to the Fund, a portfolio or any class of
shares of a portfolio. The person making such payments may do so out of its
revenues, its
35
<PAGE>
profits or any other source available to it. Such services arrangements, when
in effect, are made generally available to all qualified service providers.
The adviser may also compensate its affiliated companies for referring
investors to a portfolio.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if the
Board specifically approves such continuance every year. The Board or UAMFSI
may terminate the Fund Administration Agreement, without penalty, on not less
than ninety (90) days' written notice. The Fund Administration Agreement
automatically terminates upon its assignment by UAMFSI without the prior
written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
36
<PAGE>
Administration and Transfer Agency Services Fees
Each portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, a portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio
at the following rates:
<TABLE>
<CAPTION>
Annual Rate
-----------------------------------------------------------------------------------
<S> <C>
Growth Portfolio 0.043%
-----------------------------------------------------------------------------------
Equity Portfolio 0.043%
-----------------------------------------------------------------------------------
Special Equity Portfolio 0.043%
-----------------------------------------------------------------------------------
Strategic Balanced Portfolio 0.063%
-----------------------------------------------------------------------------------
Bond Portfolio 0.043%
</TABLE>
2. Each portfolio also pays a fee to UAMFSI for sub-administration and
other services provided by SEI. The fee, which UAMFSI pays to SEI, is
calculated at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM
Funds Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its
services as transfer agent and dividend-disbursing agent equal to
$10,500 for the first operational class and $10,500 for each
additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational
class and $2,500 for each additional class.
For the last three fiscal years the portfolios paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio
1999 $ 47,716 $ 94,417 $142,133
- -------------------------------------------------------------------------------------------------------------------------
1998 $199,766 $137,236 $337,002
- -------------------------------------------------------------------------------------------------------------------------
1997 $ 60,383 $149,705 $210,088
- -------------------------------------------------------------------------------------------------------------------------
Equity Portfolio
1999 $ 27,368 $ 69,855 $ 97,223
- -------------------------------------------------------------------------------------------------------------------------
1998 $ 93,669 $ 76,332 $170,001
- -------------------------------------------------------------------------------------------------------------------------
1997 $ 6,234 $ 47,783 $ 54,017
- -------------------------------------------------------------------------------------------------------------------------
Special Equity Portfolio
1999 $ 81,073 $123,173 $204,246
- -------------------------------------------------------------------------------------------------------------------------
1998 $358,557 $245,389 $603,946
- -------------------------------------------------------------------------------------------------------------------------
1997 $158,197 $386,035 $544,232
- -------------------------------------------------------------------------------------------------------------------------
Strategic Balanced Portfolio
1999 $ 58,484 $ 84,804 $143,288
- -------------------------------------------------------------------------------------------------------------------------
1998 $162,819 $107,247 $270,066
- -------------------------------------------------------------------------------------------------------------------------
1997 $ 50,769 $104,773 $155,542
- -------------------------------------------------------------------------------------------------------------------------
Bond Portfolio
1999 $ 39,507 $ 74,467 $113,974
- -------------------------------------------------------------------------------------------------------------------------
1998 $ 86,660 $ 63,143 $149,803
- -------------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
</TABLE>
37
<PAGE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
Each Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect to
all transactions for the portfolio. The adviser may select brokers based on
research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and not
instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes it
is reasonable to do so in light of the value of the research, statistical, and
pricing services provided by the broker effecting the transaction.
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for
their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for each portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the same
security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolios, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
38
<PAGE>
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When a portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
Commissions Paid
For the last three fiscal years, the portfolios paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
---------------------------------------------------------------------
<S> <C>
Growth Portfolio $ 251,774
1999
---------------------------------------------------------------------
1998 $ 386,341
---------------------------------------------------------------------
1997 $ 337,150
---------------------------------------------------------------------
Equity Portfolio $ 124,840
1999
---------------------------------------------------------------------
1998 $ 68,643
---------------------------------------------------------------------
1997 $ 41,994
---------------------------------------------------------------------
Special Equity Portfolio $1,338,694
1999
---------------------------------------------------------------------
1998 $ 503,483
---------------------------------------------------------------------
1997 $ 489,884
---------------------------------------------------------------------
Strategic Balanced Portfolio $ 121,366
1999
---------------------------------------------------------------------
1998 $ 128,495
---------------------------------------------------------------------
1997 $ 120,042
---------------------------------------------------------------------
Bond Portfolio $ 0
1999
---------------------------------------------------------------------
1998 $ 0
---------------------------------------------------------------------
1997 N/A
</TABLE>
Capital Stock And Other Securities
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its name
to "UAM Funds, Inc." The Fund's principal executive office is located at 211
Congress Street, Boston, MA 02110; however, shareholders should direct all
correspondence to the address listed on the cover of this SAI. The Fund is an
open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing board
to issue three billion shares of common stock, with a $.001 par value. The
governing board has the power to create and designate one or more series
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder approval.
When issued and paid for, the shares of each series and class of the Fund are
fully paid and nonassessable, and have no pre-emptive rights or preference as
to conversion, exchange, dividends, retirement or other features.
The shares of each series and class have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of members of the governing board can elect all of the members if they choose
to do so. On each matter submitted to a vote of the shareholders, a
shareholder is entitled to one vote for each full share held (and a
fractional vote
39
<PAGE>
for each fractional share held), then standing in his name on the books of the
Fund. Shares of all classes will vote together as a single class except when
otherwise required by law or as determined by the members of the Fund's
governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. The liquidation of any portfolio
or class thereof may be authorized at any time by vote of a majority of the
members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are identical
in all respects. Unlike Institutional and Adviser Class Shares, Institutional
Service Class Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Adviser
Class Shares impose a sales load on purchases. The classes also have
different exchange privileges. The net income attributable to Institutional
Service Class Shares and the dividends payable on Institutional Service Class
Shares will be reduced by the amount of the shareholder servicing and
distribution fees; accordingly, the net asset value of the Institutional
Service Class Shares will be reduced by such amount to the extent a portfolio
has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
Each portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year so that the portfolio itself generally will be relieved
of federal income and excise taxes. If a portfolio were to fail to so
qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction.
A portfolios' dividends that are paid to their corporate shareholders and are
attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
40
<PAGE>
Purchase, Redemption And Pricing Of Shares
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to the
NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. For purposes of this calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued neither exceeding the asked prices nor less than
the bid prices. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The converted value is based upon the
bid price of the foreign currency against U.S. dollars quoted by any major
bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
41
<PAGE>
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the Fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "How the Fund Values it Assets"
at the next determination of net asset value after acceptance. The Fund
will issue shares of the portfolio at the NAV of the portfolio determined
as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and
that there are no restrictions on their resale imposed by the 1933 Act
or otherwise;
. All dividends, interest, subscription, or other rights pertaining to
such securities become the property of the portfolio and are delivered
to the fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all
securities of the same issuer held by the portfolio cannot exceed 5% of
the net assets of the portfolio. This condition does not apply to U.S.
government securities.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for federal income tax purposes depending upon the cost of securities
or local currency exchanged. Investors interested in such exchanges should
contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of shares or
dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and other
organizations.
By Telephone
42
<PAGE>
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to
receive redemption proceeds. To change an account in this manner, you must
submit a written request signed by each shareholder, with each signature
guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable
for any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the UAMSSC
does not employ the procedures described above. Neither the Fund nor the
UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to
be genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment of
redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth
under "Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to issue signature
guarantees.
43
<PAGE>
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any time.
Such instructions may include limiting the amount or frequency of exchanges
and may be for the purpose of assuring such exchanges do not disadvantage the
Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock
certificate or any stock power must be guaranteed in the same manner as
described under "Signature Guarantees." As in the case of redemptions, the
written request must be received in good order before any transfer can be
made.
Performance Calculations
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. The performance is calculated separately for
each Class of a portfolio. Dividends paid by a portfolio with respect to each
Class will be calculated in the same manner at the same time on the same day
and will be in the same amount, except that service fees, distribution
charges and any incremental transfer agency costs relating to Institutional
Service Class Shares will be borne exclusively by that class.
44
<PAGE>
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in a portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a
stated period. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period.
The fund calculates the average annual total return of a portfolio by finding
the average annual compounded rates of return over one, five and ten-year
periods that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each one, five and ten-year period and the
deduction of all applicable Fund expenses on an annual basis. Since
Institutional Service Class Shares bear additional service and distribution
expenses, their average annual total return will generally be lower than that
of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of
the 1, 5 or 10 year periods (or fractional portion thereof).
Set forth in the table below are the portfolios' average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from a
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of 10 Years or 30-Day
One Year Five Years Since Inception Yields Inception Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 26.90% 22.43% 18.11% N/A 12/1/93
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Service Class Shares 26.61% N/A 21.47% N/A 3/22/96
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 26.17% N/A 23.78% N/A 7/1/96
- ---------------------------------------------------------------------------------------------------------------------------------
Special Equity Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 71.28% 19.51% 16.66% N/A 10/2/89
- ---------------------------------------------------------------------------------------------------------------------------------
Strategic Balanced Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 15.74% 16.22% 12.72% N/A 12/1/93
- ---------------------------------------------------------------------------------------------------------------------------------
Bond Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 1.14% N/A 4.64% 6.51% 11/3/97
- ---------------------------------------------------------------------------------------------------------------------------------
Institutional Service Class Shares 0.42% N/A 4.38% 6.31% 11/7/97
</TABLE>
45
<PAGE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in a portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds.
As this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during
the base period. Since Institutional Service Class shares bear additional
service and distribution expenses, their yield will generally be lower than
that of the Institutional Class Shares.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
COMPARISONS
- --------------------------------------------------------------------------------
A portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data
reported in financial and industry publications, and various indices as
further described in this SAI. This information may also be included in
sales literature and advertising.
To help investors better evaluate how an investment in a portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various
financial publications. Advertisements may also compare performance (as
calculated above) to performance as reported by other investments, indices
and averages. Please see "Comparative Benchmarks" for publications, indices
and averages that may be used.
In assessing such comparisons of performance, an investor should keep in
mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in a
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by a portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that a portfolio will continue this
performance as compared to such other averages.
46
<PAGE>
Financial Statements
The following documents are included in the portfolios' October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser to each portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Distribution Plan refers to the Distribution Plan the Fund has adopted for
its Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Fund refers to UAM Funds, Inc. II.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Plan member refers to members of the board who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Plans.
Plans refers to the Distribution and Shareholder Servicing Plans the Fund
has adopted for its Service Class Shares pursuant to Rule 12b-1 under the
1940 Act.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 Act, the 1940 Act and
the 1934 Act.
Service Plan refers to the Shareholder Servicing Plan the Fund has adopted
for its Service Class Shares pursuant to Rule 12b-1 under the 1940 Act.
Service Class means the Institutional Service Class shares of a portfolio.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
47
<PAGE>
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
Bond Ratings
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within
the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will
remain relatively well-maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-
medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classification,
earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa An issue that which is rated "baa" is considered to be a
medium--grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate
at present but may be questionable over any great length of
time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not
well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue
over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payments.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can thus be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each
minus (-) rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating
catefory; the modifier 2 indicates a mid-range ranking and the
modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
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Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals) Bonds
for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
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Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
. Leading market positions in well-established industries.
. Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
. Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the
level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's Ratings Services
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
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<PAGE>
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations
are typically rated lower than senior obligations, to reflect the lower
priority in bankruptcy, as noted above. Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to meet
its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
Obligations rated 'BB', 'B', 'CCC' , 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposures to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment,
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on
the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C A subordinated debt or preferred stock obligation rated 'C' is
CURENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been
filed or similar action taken, but payments on this obligation
are being continued. A 'C' will also be assigned to a preferred
stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
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<PAGE>
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating.
Examples include: obligation linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk - such as interest-only or principal-only mortgage securities;
and obligations with unusually risky interest terms, such as inverse
floaters.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the
obligor's capacity to meet its financial commitment on the obligation
is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment
on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poors' believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is
a key factor in this analysis. An obligor's capacity to repay foreign
currency obligations may be lower than its capacity to repay obligations in
its local currency due to the sovereign government's own relatively lower
capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific
issues. Foreign currency issuer ratings are also distinguished from local
currency issuer ratings to identity those instances where sovereign risks
make them different for the same issuer.
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DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is modest
AA- but may vary slightly from time to time because of economic
conditions.
A+/A/A- Protection factors are average but adequate. However, risk factors are
more variable in periods of greater economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors fluctuate
according to industry conditions. Overall quality may move up or
down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation will not be
met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
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<PAGE>
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment
of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic
change over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated
in this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and
economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that
default of some kind appears probable. `C' ratings signal imminent
default.
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<PAGE>
DDD,DD,D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery
values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD"
obligations have the highest potential for recovery, around 90%-100%
of outstanding amounts and accrued interest. "D" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated "DDD"
have the highest prospect for resumption of performance or continued
operation with or without a formal reorganization process. Entities
rated "DD" and "D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to satisfy a higher
portion of their outstanding obligations, while entities rated "D"
have a poor prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for timely payment
of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than
`F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. Rating Alert is typically resolved over a
relatively short period.
Comparative Benchmarks
(alphabetically)
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<PAGE>
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of
Labor Statistics -- a statistical measure of change, over time in the price of
goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange. It has been a widely followed indicator of the stock
market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World, Forbes,
Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global Investor,
Investor's Daily, Lipper, Inc., Morningstar, Inc., The New York Times, Personal
Investor, The Wall Street Journal and Weisenberger Investment Companies
Service --publications that rate fund performance over specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch & Co.,
Inc., Lehman Brothers, Inc. and Bloomberg L.P.
IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-weighted
index maintained by the International Finance Corporation. This index consists
of over 890 companies in 26 emerging equity markets, and is designed to measure
more precisely the returns portfolio managers might receive from investment in
emerging markets equity securities by focusing on companies and markets that are
legally and practically accessible to foreign investors.
Lehman Brothers Indices:
- ------------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues, agency
issues, corporate bond issues and mortgage backed securities. It includes fixed
rate issuers of investment grade (BBB) or higher, with maturities of at least
one year and outstanding par values of at least $100 million for U.S. government
issues and $25 million for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate debt.
Also included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued debt
of U.S. government agencies and quasi-federal corporations, and corporate debt
guaranteed by the U.S. government). In addition to the aggregate index, sub-
indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of at
least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded during the
month is held in the index until month end and then removed. All returns are
market value weighted inclusive of accrued income.
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<PAGE>
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar denominated,
noncovertible, have at least one year remaining to maturity and an outstanding
par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Associateion (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with
12 indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment objectives
were changed while other equity objectives remain unchanged. Changing
investment objectives include Capital Appreciation Funds, Growth Funds, Mid-
Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income Funds, and Equity
Income Funds. Unchanged investment objectives include Sector Equity Funds,
World Equity Funds, Mixed Equity Funds, and certain other funds including all
Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group;
2) number of component funds remains the same (30); 3) component funds are
defined annually; 4) can be linked historically; and 5) are used as a
benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but
are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt
issues (BBB or higher) with dollar-weighted average maturities of one to five
years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing 60%
or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by prospectus
or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to
grow significantly faster than the earnings of the stocks represented in the
major unmanaged stock indices. (Equity category)
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<PAGE>
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions, exclusive
of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities
from 1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market value-
weighted averages of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
----------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of
the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000
Index.
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
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Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell
Top 200 companies with higher price-to-book ratios and higher forecasted
growth values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and does
not reflect any transaction costs. Direct investment in the index is not
possible.
Standard & Poor's U.S. Indices:
-------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10
economic sectors aggregated from 23 industry groups, 59 industries, and 123
sub-industries covering almost 6,000 companies globally. The new
classification standard will be used with all of their respective indices.
Features of the new classification include 10 economic sectors, rather than
the 11 S&P currently uses. Sector and industry gradations are less severe.
Rather than jumping from 11 sectors to 115 industries under the former S&P
system, the new system progresses from 10 sectors through 23 industry groups,
50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its market
value. It is used by over 95% of U.S. managers and pension plan sponsors. More
than $25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The
index is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred
benchmark for both active and passive management due to its low turnover and
greater liquidity. Approximately $8 billion is indexed to the S&P SmallCap
600.
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S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80%
of the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including 23
electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
---------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
---------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as
the new Canadian large cap benchmark and will ultimately replace the Toronto
35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan --
are represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad
enough to provide representation of the market, but narrow enough to ensure
liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization)
of the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
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Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used
by the institutional investment community as a broad measure of the
performance of public real estate equity for asset allocation and performance
comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The Sterling Partners' Portfolios
Sterling Partners' Balanced Portfolio
Sterling Partners' Equity Portfolio
Sterling Partners' Small Cap Value Portfolio
Institutional Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the portfolios dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address listed
above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments................................................................................. 1
What Investment Strategies May the Portfolios Use?................................................................ 1
Debt Securities................................................................................................... 2
Derivatives....................................................................................................... 9
Equity Securities................................................................................................. 17
Foreign Securities................................................................................................ 19
Investment Companies.............................................................................................. 22
Repurchase Agreements............................................................................................. 23
Restricted Securities............................................................................................. 23
Securities Lending................................................................................................ 23
When Issued Transactions.......................................................................................... 24
Investment Policies of the Portfolios................................................................................ 24
Fundamental Policies.............................................................................................. 24
Non-Fundamental Policies.......................................................................................... 26
Management Of The Fund............................................................................................... 27
Principal Shareholders............................................................................................... 28
Investment Advisory and Other Services............................................................................... 29
Investment Adviser................................................................................................ 29
Distributor....................................................................................................... 31
Shareholder Servicing Arrangements................................................................................ 31
Administrative Services........................................................................................... 32
Custodian......................................................................................................... 33
Independent Accountants........................................................................................... 33
Brokerage Allocation and Other Practices............................................................................. 34
Selection of Brokers.............................................................................................. 34
Simultaneous Transactions......................................................................................... 34
Brokerage Commissions............................................................................................. 34
Capital Stock and Other Securities................................................................................... 35
Description Of Shares And Voting Rights........................................................................... 35
Purchase, Redemption and Pricing of Shares........................................................................... 36
Net Asset Value Per Share......................................................................................... 36
Purchase of Shares................................................................................................ 37
Redemption of Shares.............................................................................................. 38
Exchange Privilege................................................................................................ 40
Transfer Of Shares................................................................................................ 40
Performance Calculations............................................................................................. 40
Total Return...................................................................................................... 41
Yield............................................................................................................. 41
Comparisons....................................................................................................... 42
Financial Statements................................................................................................. 42
Glossary............................................................................................................. 43
Bond Ratings......................................................................................................... 43
Moody's Investors Service, Inc.................................................................................... 43
Standard & Poor's Ratings Services................................................................................ 46
Duff & Phelps Credit Rating Co.................................................................................... 48
Fitch IBCA Ratings................................................................................................ 49
Comparative Benchmarks............................................................................................... 51
</TABLE>
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
What Investment Strategies May the Portfolios Use?
- --------------------------------------------------------------------------------
The portfolios currently intend to use the securities and investment
strategies listed below in seeking their objectives; however, they may at
any time invest in any of the investment strategies described in this SAI.
This SAI describes each of these investments/strategies and their risks. A
portfolio may not notify shareholders before employing new strategies,
unless it expects such strategies to become principal strategies. The
investments that are italicized are principal strategies and you can find
more information on these techniques in the prospectus of the portfolio.
You can find more information concerning the limits on the ability of the
portfolios to use these investments in "What Are the Investment Policies of
the Portfolios?"
Equity Portfolio
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Small Cap Value Portfolio
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Balanced Portfolio
. Equity securities.
. Debt securities.
. Futures.
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. Options.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Debt Securities
- --------------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities,
such as zero-coupon bonds, do not pay current interest and are purchased at
a discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a
government-sponsored entity has issued (agency securities). Treasury
securities include treasury notes, which have initial maturities of one to
ten years and treasury bonds, which have initial maturities of at least ten
years and certain types of mortgage-backed securities that are described
under "Mortgage-Backed Securities" and "Other Asset-Backed Securities."
This SAI discusses mortgage-backed treasury and agency securities in detail
in the section called "Mortgage-Backed Securities" and "Other Asset-Backed
Securities."
The full faith and credit of the U.S. government supports treasury
securities. Unlike treasury securities, the full faith and credit of the
U.S. government generally do not back agency securities. Agency securities
are typically supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and
interest, their market value is not guaranteed. U.S. government securities
are subject to the same interest rate and credit risks as other fixed
income securities. However, since U.S. government securities are of the
highest quality, the credit risk is minimal. The U.S. government does not
guarantee the net asset value of the assets of a portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or
for capital expenditures such as plant construction, equipment purchases
and expansion. In return for the money loaned to the corporation by
investors, the corporation promises to pay investors interest, and repay
the principal amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble
as securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly
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payments that consist of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Since homeowners usually have the
option of paying either part or all of the loan balance before maturity,
the effective maturity of a mortgage-backed security is often shorter than
is stated.
Governmental entities, private insurers and the mortgage poolers may insure
or guarantee the timely payment of interest and principal of these pools
through various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The adviser
will consider such insurance and guarantees and the creditworthiness of the
issuers thereof in determining whether a mortgage-related security meets
its investment quality standards. It is possible that the private insurers
or guarantors will not meet their obligations under the insurance policies
or guarantee arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related
securities. GNMA is a wholly owned corporation of the U.S. government and
it falls within the Department of Housing and Urban Development. Securities
issued by GNMA are treasury securities, which means the full faith and
credit of the U.S. government backs them. GNMA guarantees the timely
payment of principal and interest on securities issued by institutions
approved by GNMA and backed by pools of FHA-insured or VA-guaranteed
mortgages. GNMA does not guarantee the market value or yield of
mortgage-backed securities or the value of a portfolio's shares. To buy
GNMA securities, a portfolio may have to pay a premium over the maturity
value of the underlying mortgages, which the portfolio may lose if
prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks and
credit unions and mortgage bankers. Securities issued by FNMA are agency
securities, which means FNMA, but not the U.S. government, guarantees their
timely payment of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing.
FHLMC issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by
the full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
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<PAGE>
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these
issuers generally offer a higher rate of interest than pools created by
GNMA, FNMA & FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually
monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing a portfolio to reinvest
the money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the
loans underlying a mortgage-backed security sooner than expected. If the
prepayment rates increase, a portfolio may have to reinvest its principal
at a rate of interest that is lower than the rate on existing
mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other
than mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are
pass-through. In general, the collateral supporting these securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available
to support payments on these securities. For example, credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which allow debtors to reduce their balances by offsetting certain amounts
owed on the credit cards. Most issuers of asset-backed securities backed by
automobile receivables permit the servicers of such receivables to retain
possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Due to the quantity of vehicles involved and
requirements under state laws, asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the
obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure
the receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by
the issuer or sponsor from third parties, for some or all of the assets in
the pool ("credit support"). Delinquency or loss more than that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
A portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of
asset-backed securities depends in part on the characteristics of the
underlying
4
<PAGE>
assets, the coupon rates on the securities, prevailing interest rates, the
amount of administrative expenses and the actual prepayment experience on
the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay
principal monthly. While whole mortgage loans may collateralize CMOs,
mortgage-backed securities guaranteed by GNMA, FHLMC, or FNMA and their
income streams more typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code of 1986, as amended, and invests in certain mortgages
primarily secured by interests in real property and other permitted
investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired
by its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest
tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its
assets in the short-term securities listed below, U.S. government
securities and investment-grade corporate debt securities. Unless otherwise
specified, a short-term debt security has a maturity of one year or less.
Bank Obligations
A portfolio will only invest in a security issued by a commercial bank if
the bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance
Corporation; and
. is a foreign branch of a U.S. bank and the adviser believes the
security is of an investment quality comparable with other debt
securities that the portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term
with the understanding that the depositor can withdraw its money only by
giving notice to the institution. However, there may be early withdrawal
penalties depending upon market conditions and the remaining maturity of
the obligation. A portfolio may only purchase time deposits maturing from
two business days through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a
definite period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial
transaction (to finance the import, export, transfer or storage of
goods).
5
<PAGE>
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1
to 270 days issued by banks, corporations and other borrowers. Such
investments are unsecured and usually discounted. A portfolio may invest in
commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured
debt issue rated A or better by Moody's or by S&P. See "Bond Ratings" for a
description of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class
mortgage-backed securities. Stripped mortgage-backed securities usually
have two classes that receive different proportions of interest and
principal distributions on a pool of mortgage assets. Typically, one class
will receive some of the interest and most of the principal, while the
other class will receive most of the interest and the remaining principal.
In extreme cases, one class will receive all of the interest ("interest
only" or "IO" class) while the other class will receive the entire
principal sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage loans or mortgage-backed
securities. A rapid rate of principal payments may adversely affect the
yield to maturity of IOs. Slower than anticipated prepayments of principal
may adversely affect the yield to maturity of a PO. The yields and market
risk of interest only and principal only stripped mortgage-backed
securities, respectively, may be more volatile than those of other fixed
income securities, including traditional mortgage-backed securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States
by foreign entities. Investment in these securities involve certain risks
which are not typically associated with investing in domestic securities.
See "FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are
sold at a discount from their face value. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. The amount
of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. The market value of zero coupon
securities may exhibit greater price volatility than ordinary debt
securities because a stripped security will have a longer duration than an
ordinary debt security with the same maturity. A portfolio's investments in
pay-in-kind, delayed and zero coupon bonds may require it to sell certain
of its portfolio securities to generate sufficient cash to satisfy certain
income distribution requirements.
These securities may include treasury securities that have had their
interest payments ("coupons") separated from the underlying principal
("corpus") by their holder, typically a custodian bank or investment
brokerage firm. Once the holder of the security has stripped or separated
corpus and coupons, it may sell each component separately. The principal or
corpus is then sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not
receive any rights to periodic interest (cash) payments. Typically, the
coupons are sold separately or grouped with other coupons with like
maturity dates and sold bundled in such form. The underlying treasury
security is held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the
owners thereof. Purchasers of stripped obligations acquire, in effect,
discount obligations that are economically identical to the zero coupon
securities that the Treasury sells itself.
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The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on Treasury securities
through the Federal Reserve book-entry record keeping system. Under a
Federal Reserve program known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities," a portfolio can record
its beneficial ownership of the coupon or corpus directly in the book-entry
record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay
the amount it borrowed (principal) from investors. Some debt securities,
however, are callable, meaning the issuer can repay the principal earlier,
on or after specified dates (call dates). Debt securities are most likely
to be called when interest rates are falling because the issuer can
refinance at a lower rate, similar to a homeowner refinancing a mortgage.
The effective maturity of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead,
it calculates its weighted average maturity. This number is an average of
the stated maturity of each debt security held by a portfolio, with the
maturity of each security weighted by the percentage of the assets of the
portfolio it represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes
in interest rates. It measures sensitivity more accurately than maturity
because it takes into account the time value of cash flows generated over
the life of a debt security. Future interest payments and principal
payments are discounted to reflect their present value and then are
multiplied by the number of years they will be received to produce a value
expressed in years -- the duration. Effective duration takes into account
call features and sinking fund prepayments that may shorten the life of a
debt security.
An effective duration of 4 years, for example, would suggest that for each
1% reduction in interest rates at all maturity levels, the price of a
security is estimated to increase by 4%. An increase in rates by the same
magnitude is estimated to reduce the price of the security by 4%. By
knowing the yield and the effective duration of a debt security, one can
estimate total return based on an expectation of how much interest rates,
in general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
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Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
A portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of a portfolio. If
left unattended, drifts in the average maturity of a portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of a portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security
increases the risk of depreciation due to future increases in market
interest rates. For these reasons, mortgage-backed securities may be less
effective than other types of U.S. government securities as a means of
"locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation
for assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer
higher yields than Treasury securities because their payment of interest
and complete repayment of principal is less certain. The credit rating or
financial condition of an issuer may affect the value of a debt security.
Generally, the lower the quality rating of a security, the greater the
risks that the issuer will fail to pay interest and return principal. To
compensate investors for taking on increased risk, issuers with lower
credit ratings usually offer their investors a higher "risk premium" in the
form of higher interest rates above comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an
adjustment to this "risk premium." Since an issuer's outstanding debt
carries a fixed coupon, adjustments to the risk premium must occur in the
price, which effects the yield to maturity of the bond. If an issuer
defaults or becomes unable to honor its financial obligations, the bond may
lose some or all of its value.
A security rated within the four highest rating categories by a rating
agency is called investment-grade because its issuer is more likely to pay
interest and repay principal than an issuer of a lower rated bond. Adverse
economic conditions or changing circumstances, however, may weaken the
capacity of the issuer to pay interest and repay principal. If a security
is not rated or is rated under a different system, the adviser may
determine that it is of investment-grade. The adviser may retain securities
that are downgraded, if it believes that keeping those securities is
warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit
worthy and/or highly leveraged (indebted) companies. A corporation may
issue a junk bond because of a corporate restructuring or other similar
event. Compared with investment-grade bonds, junk bonds carry a greater
degree of risk and are less likely to make payments of interest and
principal. Market developments and the financial and business condition of
the corporation issuing these securities influences their price and
liquidity more than changes in interest rates, when compared to
investment-grade debt securities. Insufficient liquidity in the junk bond
market may make it more difficult to dispose of junk bonds and may cause a
portfolio to experience sudden and substantial price declines. A lack of
reliable, objective data or market quotations may make it more difficult to
value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's
opinion, not an absolute standard of quality, and they do not reflect an
evaluation of market risk.
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The section "Bond Ratings" contains further information concerning the
ratings of certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time a portfolio buys it. A
rating agency may change its credit ratings at any time. The adviser
monitors the rating of the security and will take appropriate actions if a
rating agency reduces the security's rating. A portfolio is not obligated
to dispose of securities whose issuers subsequently are in default or which
are downgraded below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner,
to reduce transaction costs or to remain fully invested. They may also
invest in derivatives to protect it from broad fluctuations in market
prices, interest rates or foreign currency exchange rates. Investing in
derivatives for these purposes is known as "hedging." When hedging is
successful, the portfolio will have offset any depreciation in the value of
its portfolio securities by the appreciation in the value of the derivative
position. Although techniques other than the sale and purchase of
derivatives could be used to control the exposure of the portfolio to
market fluctuations, the use of derivatives may be a more effective means
of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party
sells and the other party agrees to buy a specified amount of a financial
instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index,
interest rate, foreign exchange rate or other similar instrument. Agreeing
to buy the underlying financial information is called buying a futures
contract or taking a long position in the contract. Likewise, agreeing to
sell the underlying financial instrument is called selling a futures
contract or taking a short position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal
agency. These contract markets standardize the terms, including the
maturity date and underlying financial instrument, of all futures
contracts.
Unlike other securities, the parties to a futures contract do not have to
pay for or deliver the underlying financial instrument until some future
date (the delivery date). Contract markets require both the purchaser and
seller to deposit "initial margin" with a futures broker, known as a
futures commission merchant, when they enter into the contract. Initial
margin deposits are typically equal to a percentage of the contract's
value. After they open a futures contract, the parties to the transaction
must compare the purchase price of the contract to its daily market value.
If the value of the futures contract changes in such a way that a party's
position declines, that party must make additional "variation margin"
payments so that the margin payment is adequate. On the other hand, the
value of the contract may change in such a way that there is excess margin
on deposit, possibly entitling the party that has a gain to receive all or
a portion of this amount. This process is known as "marking to the market."
Although the actual terms of a futures contract calls for the actual
delivery of and payment for the underlying security, in many cases the
parties may close the contract early by taking an opposite position in an
identical contract. If the sale price upon closing out the contract is less
than the original purchase price, the person closing out the contract will
realize a loss. If the sale price upon closing out the contract is more
that the original purchase price, the person closing out the contract will
realize a gain. The opposite is also true. If the purchase price upon
closing out the contract is more than
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the original sale price, the person closing out the contract will realize a
loss. If the purchase price upon closing out the contract is less than the
original sale price, the person closing out the contract will realize a
gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the exercise
price plus the premium paid and related transaction costs. Otherwise, the
portfolio would realize either no gain or a loss on the purchase of the
call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
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Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract; or
. In case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities
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index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price
fluctuations in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract
(in the case of a put option) at a fixed time and price. Upon exercise of
the option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put
option). If the option is exercised, the parties will be subject to the
futures contracts. In addition, the writer of an option on a futures
contract is subject to initial and variation margin requirements on the
option position. Options on futures contracts are traded on the same
contract market as the underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e.,
the same exercise price and expiration date) as the option previously
purchased or sold. The difference between the premiums paid and received
represents the trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts
instead of selling or buying futures contracts. The portfolio may buy a put
option on a futures contract for the same reasons it would sell a futures
contract. It also may purchase such put options in order to hedge a long
position in the underlying futures contract. The portfolio may buy call
options on futures contracts for the same purpose as the actual purchase of
the futures contracts, such as in anticipation of favorable market
conditions.
The portfolio may write a call option on a futures contract to hedge
against a decline in the prices of the instrument underlying the futures
contracts. If the price of the futures contract at expiration were below
the exercise price, the portfolio would retain the option premium, which
would offset, in part, any decline in the value of its portfolio
securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if the market price
declines, the portfolio would pay more than the market price for the
underlying instrument. The premium received on the sale of the put option,
less any transaction costs, would reduce the net cost to the
portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each
other, or in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For example, the
portfolio could construct a combined position whose risk and return
characteristics are similar to selling a futures contract by purchasing a
put option and writing a call option on the same underlying instrument.
Alternatively, the portfolio could write a call option at one strike price
and buy a call option at a lower price to reduce the risk of the written
call option in the event of a substantial price increase. Because combined
options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
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. Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their customers,
as opposed to futures contracts which are traded only on exchanges
regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to
a commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in losses if the currency
used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the
portfolio to assume the risk of fluctuations in the value of the currency
it purchases. Cross hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of
cash flows between two parties on specified dates (settlement dates), where
the cash flows are based on agreed-upon prices, rates, indices, etc. The
nominal amount
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on which the cash flows are calculated is called the notional amount. Swaps
are individually negotiated and structured to include exposure to a variety
of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing
rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to
and from the portfolio. If a swap agreement calls for payments by the
portfolio, the portfolio must be prepared to make such payments when due.
In addition, if the counter-party's creditworthiness declined, the value of
a swap agreement would be likely to decline, potentially resulting in
losses.
Generally, swap agreements have a fixed maturity date that will be agreed
upon by the parties. The agreement can be terminated before the maturity
date only under limited circumstances, such as default by one of the
parties or insolvency, among others, and can be transferred by a party only
with the prior written consent of the other party. The portfolio may be
able to eliminate its exposure under a swap agreement either by assignment
or by other disposition, or by entering into an offsetting swap agreement
with the same party or a similarly creditworthy party. If the counter-party
is unable to meet its obligations under the contract, declares bankruptcy,
defaults or becomes insolvent, the portfolio may not be able to recover the
money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements
according to guidelines established by the SEC. If the portfolio enters
into a swap agreement on a net basis, it will segregate assets with a daily
value at least equal to the excess, if any, of the portfolio's accrued
obligations under the swap agreement over the accrued amount the portfolio
is entitled to receive under the agreement. If the portfolio enters into a
swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the portfolio's accrued obligations under
the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in
return for a specified interest rate. By entering into an equity index
swap, for example, the index receiver can gain exposure to stocks making up
the index of securities without actually purchasing those stocks. Equity
index swaps involve not only the risk associated with investment in the
securities represented in the index, but also the risk that the performance
of such securities, including dividends, will not exceed the return on the
interest rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of
interest rate cash flow on specified dates in the future. Some of the
different types of interest rate swaps are "fixed-for floating rate swaps,"
"termed basis swaps" and "index amortizing swaps." Fixed-for floating rate
swap involve the exchange of fixed interest rate cash flows for floating
rate cash flows. Termed basis swaps entail cash flows to both parties based
on floating interest rates, where the interest rate indices are different.
Index amortizing swaps are typically fixed-for floating swaps where the
notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the portfolio enters into a swap where it agrees
to exchange a floating rate of interest for a fixed rate of interest, the
portfolio may have to pay more money than it receives. Similarly, if the
portfolio enters into a swap where it agrees to exchange a fixed rate of
interest for a floating rate of interest, the portfolio may receive less
money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in
which one party agrees to make interest rate payments in one currency and
the other promises to make interest rate payments in another currency. A
portfolio may enter into a currency swap when it has one currency and
desires a different currency. Typically the interest rates that determine
the currency swap payments are fixed, although occasionally one or both
parties may pay a floating rate of interest. Unlike an interest rate swap,
however, the principal amounts are exchanged at the beginning of the
contract and returned at the end of the contract. Changes in foreign
exchange rates and changes in interest rates, as described above may
negatively affect currency swaps.
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Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level. The seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these
transactions themselves entail certain other risks. For example,
unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance of the portfolio
than if it had not entered into any derivatives transactions. Derivatives
may magnify the portfolio's gains or losses, causing it to make or lose
substantially more than it invested.
When used for hedging purposes, increases in the value of the securities
the portfolio holds or intends to acquire should offset any losses incurred
with a derivative. Purchasing derivatives for purposes other than hedging
could expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends
on the degree to which price movements in the underlying index or
instrument correlate with price movements in the relevant securities. In
the case of poor correlation, the price of the securities the portfolio is
hedging may not move in the same amount, or even in the same direction as
the hedging instrument. The adviser will try to minimize this risk by
investing only in those contracts whose behavior it expects to resemble the
portfolio securities it is trying to hedge. However, if the portfolio's
prediction of interest and currency rates, market value, volatility or
other economic factors is incorrect, the portfolio may lose money, or may
not make as much money as it expected.
Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence:
. current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an
instrument stops; and
. differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the
participation of speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based
on a broad market index. Since narrower indices are made up of a smaller
number of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-
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denominated security from a decline in the yen, but will not protect the
portfolio against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the portfolio's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency
options and futures to the value of the portfolio's investments precisely
over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio
can terminate it only by entering into a closing purchase or sale
transaction. Moreover, a portfolio may close out a futures contract only on
the exchange the contract was initially traded. Although a portfolio
intends to purchase options and futures only where there appears to be an
active market, there is no guarantee that such a liquid market will exist.
If there is no secondary market for the contract, or the market is
illiquid, the portfolio may not be able to close out its position. In an
illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a
time when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time
and price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives,
which sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of
an exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
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. national and international political events.
Most exchanges limit the amount by which the price of a derivative can
change during a single trading day. Daily trading limits establish the
maximum amount that the price of a derivative may vary from the settlement
price of that derivative at the end of trading on the previous day. Once
the price of a derivative reaches this value, a portfolio may not trade
that derivative at a price beyond that limit. The daily limit governs only
price movements during a given day and does not limit potential gains or
losses. Derivative prices have occasionally moved to the daily limit for
several consecutive trading days, preventing prompt liquidation of the
derivative.
Because of the low margin deposits required upon the opening of a
derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative
may result in an immediate and substantial loss (as well as gain) to the
portfolio and it may lose more than it originally invested in the
derivative.
If the price of a futures contract changes adversely, the portfolio may
have to sell securities at a time when it is disadvantageous to do so to
meet its minimum daily margin requirement. The portfolio may lose its
margin deposits if a broker-dealer with whom it has an open futures
contract or related option becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other respects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a
fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
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Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that is measured in
years and entitles the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits
of owning a company, such investors must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made
by its management or lower demand for the company's products or
services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated
to the company or its industry, such as changes in interest rates,
currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the
over-the-counter market and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities
of small and medium capitalization companies are likely to be less liquid,
and subject to more abrupt or erratic market movements, than securities of
larger, more established companies.
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Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
Foreign Securities
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a
foreign currency;
. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities. EDRs are
similar to ADRs, except that they are typically issued by European Banks or
trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank
for Reconstruction and Development (World Bank) and the International
Finance Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. Investments in these investment funds are subject
to the provisions of the 1940 Act. Shareholders of a UAM Fund that invests
in such investment funds will bear not only their proportionate share of
the expenses of the UAM Fund (including operating expenses and the fees of
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the adviser), but also will bear indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may trade
at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect an investment
in foreign securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt;
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected
if their trading partners were to enact protective trade barriers and
economic conditions;
. The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit the portfolio's ability to
invest in a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may
restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
applicable to United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
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. They are generally not as developed or efficient as, and more
volatile, than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and
erratic price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays
and increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of securities denominated in that currency. Some of the factors that
may impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and
their exchange rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces;
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis;
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global, around-the-
clock market. To the extent that a market is closed while the markets
for the underlying currencies remain open, certain markets may not
always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to
recover a portion of these taxes, the portion that cannot be recovered will
reduce the income the portfolio receives from its investments. The
portfolio does not expect such foreign withholding taxes to have a
significant impact on performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
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. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions
on foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed
countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain separate currencies in any
form. Until then, however, each country and issuers within each country are
free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that adopt the Euro in all aspects of the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than
Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
Investment Companies
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A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by a portfolio. Like other shareholders, each
portfolio would pay its proportionate share of those fees. Consequently,
shareholders of a portfolio would pay not only the management fees of the
portfolio, but also the management fees of the investment company in which
the portfolio invests. A portfolio may invest up to 10% of its total assets
in the securities of other investment companies, but may not invest more
than 5% of its total assets in the securities of any one investment company
or acquire more than 3% of the outstanding securities of any one investment
company.
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The SEC has granted an order that allows a portfolio to invest the greater
of 5% of its total assets or $2.5 million in the UAM DSI Money Market
Portfolio, provided that the investment is:
. For cash management purposes;
. Consistent with a portfolio's investment policies and restrictions;
and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
Repurchase Agreements
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolios normally use repurchase agreements to
earn income on assets that are not invested.
When a portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them
or upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price
of the repurchase agreement rises above the value of the underlying
security (i.e., it will require the borrower to "mark to the market"
on a daily basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, a portfolio's right to sell
the security may be restricted. In addition, the value of the security
might decline before a portfolio can sell it and a portfolio might incur
expenses in enforcing its rights.
Restricted Securities
- --------------------------------------------------------------------------------
The portfolios may purchase restricted securities that are not registered
for sale to the general public but which are eligible for resale to
qualified institutional investors under Rule 144A of the Securities Act of
1933. Under the supervision of the Board, the Adviser determines the
liquidity of such investments by considering all relevant factors. Provided
that a dealer or institutional trading market in such securities exists,
these restricted securities are not treated as illiquid securities for
purposes of the portfolio's investment limitations. The price realized from
the sales of these securities could be more or less than those originally
paid by a portfolio or less than what may be considered the fair value of
such securities.
Securities Lending
- --------------------------------------------------------------------------------
A portfolio may lend a portion of its total assets to broker- dealers or
other financial institutions. It may then reinvest the collateral it
receives in short-term securities and money market funds. When a portfolio
lends its securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market
value of the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit
issued by a domestic U.S. bank or securities issued or guaranteed by
the U. S. government;
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
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. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements.
When the portfolio lends securities, there is a risk that the borrower will
become financially unable to honor its contractual obligations. If this
happens, the portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
When Issued Transactions
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A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, a portfolio contracts to purchase securities for a fixed price
at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities a portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. A portfolio will only enter into
these types of transactions with the intention of actually acquiring the
securities, but may sell them before the settlement date.
A portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When a portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, a portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because a portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
A portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. A portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolios
A portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, a
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
Fundamental Policies
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The following investment limitations are fundamental, which means a
portfolio cannot change them without approval by the vote of a majority of
the outstanding voting securities of the portfolio, as defined by the 1940
Act.
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Balanced and Equity Portfolios
Each of the above portfolios will not:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any agency or instrumentality
thereof).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and than, in no event, in excess of 10% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest for the purpose of exercising control over management of any
company.
. Invest in commodities.
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies a portfolio adopts a temporary defensive position.
. Invest more than 5% of its assets at the time of purchase in the
securities of companies that have (with predecessors) a continuous
operating history of less than three years.
. Issue senior securities, as defined in the Investment Company Act of
1940, as amended, except that this restriction shall not be deemed to
prohibit a portfolio from (1) making any permitted borrowings,
mortgages or pledges, or (2) entering into options, futures or
repurchase transactions.
. Make loans except by purchasing debt securities in accordance with its
investment objective and policies, or entering into repurchase
agreements, or lending its portfolio securities to banks, brokers,
dealers and other financial institutions so long as the loans are made
in compliance with the 1940 Act and the rules and regulations or
interpretations of the sec.
. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total
gross assets.
. Purchase on margin or sell short.
. Purchase or retain securities of an issuer if those officers and Board
members of the Fund or its investment advisor owning more than 1/2 of
1% of such securities together own more than 5% of such securities.
. Purchase or sell real estate or real estate limited partnerships,
although it may purchase or sell securities of companies which deal in
real estate and may purchase and sell securities which are secured by
interests in real estate.
. Underwrite the securities of other issuers or invest more than an
aggregate of 10% of the net assets of the portfolio, determined at the
time investment, in securities subject to legal or contractual
restrictions on resale or securities for which there are no readily
available markets, including repurchase agreements having maturities
of more than seven days.
. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
Small Cap Value Portfolio
The portfolio will not:
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. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any agency or instrumentality
thereof).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and than, in no event, in excess of 133 1/3% of
the portfolio's gross assets valued at the lower of market or cost.
. Invest for the purpose of exercising control over management of any
company.
. Invest in commodities.
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies a portfolio adopts a temporary defensive position.
. Invest more than 5% of its assets at the time of purchase in the
securities of companies that have (with predecessors) a continuous
operating history of less than three years.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1)
making any permitted borrowings, mortgages or pledges, or (2) entering
into futures or repurchase transactions.
. Make loans except by purchasing debt securities in accordance with its
investment objective and policies, or entering into repurchase
agreements, or lending its portfolio securities to banks, brokers,
dealers and other financial institutions so long as the loans are made
in compliance with the 1940 Act and the rules and regulations or
interpretations of the sec.
. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total
gross assets.
. Purchase on margin or sell short.
. Purchase or retain securities of an issuer if those officers and Board
members of the Fund or its investment advisor owning more than 1/2 of
1% of such securities together own more than 5% of such securities.
. Purchase or sell real estate or real estate limited partnerships,
although it may purchase or sell securities of companies which deal in
real estate and may purchase and sell securities which are secured by
interests in real estate.
. Underwrite the securities of other issuers or invest more than an
aggregate of 10% of the net assets of the portfolio, determined at the
time investment, in securities subject to legal or contractual
restrictions on resale or securities for which there are no readily
available markets, including repurchase agreements having maturities
of more than seven days.
. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
Non-Fundamental Policies
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means a portfolio may
change them without shareholder approval.
The portfolios will not:
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. Invest in stock or bond futures and/or options on futures unless (1)
not more than 5% of the portfolio's assets are required as deposit to
secure obligations under such futures and/or options on futures
contracts; and (2) not more than 20% of the portfolio's assets are
invested in stock or bond futures and options on futures.
. Invest more than 20% of the portfolio's assets in foreign securities.
In addition, the adviser intends to limit the Balanced Portfolio's fixed
income investments to investment grade securities; however, the adviser
reserves the right to retain securities which are rated Ba or B by Moody's
or BB or B by S&P if, in the adviser's judgement, maintaining a position in
the securities is warranted.
Management of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to
execute policies the board has formulated. The Fund pays each board member
who is not also an officer or affiliated person (independent board member)
a $150 quarterly retainer fee per active portfolio and a $2,000 meeting
fee. In addition, the Fund reimburses each independent board member for
travel and other expenses incurred while attending board meetings. The
$2,000 meeting fee and expense reimbursements are aggregated for all of the
board members and allocated proportionately among the portfolios of the UAM
Funds Complex. The Fund does not pay board members that are affiliated with
the fund for their services as board members. UAM, its affiliates or SEI
pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act.
Mr. English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in
the UAM Funds Complex. However, the Fund does not believe that the
relationship is a material business relationship, and, therefore, does not
consider him to be an "interested person" of the Fund. If these
circumstances change, the Board will determine whether any action is
required to change the composition of the Board.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation From
Compensation From the Fund Complex
Position Principal Occupations During the Past the Fund as of as of
Name, Address, DOB with Fund 5 years October 31, 1999 October 31, 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management $7,137 $10,625
College Road-- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company, Inc.; President of Bennett
1/26/29 Management Company from 1988 to 1993.
---------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund $7,137 $10,625
1250 24th St., NW Member since January 1999; Vice President for
Washington, DC 20037 Finance and Administration and Treasurer
8/14/51 of Radcliffe College from 1991 to 1999.
---------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief $7,137 $10,625
100 King Street West Member Administrative Officer of Philip Services
P.O. Box 2440, LCD-1 Corp.; Formerly, a Partner in the
Hamilton Ontario, Philadelphia office of the law firm
Canada L8N-4J6 Dechert Price & Rhoads and a Director of
4/21/42 Hofler Corp.
---------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of $7,137 $10,625
16 West Madison Street Member Broventure Company, Inc.; Chairman of the
Baltimore, MD 21201 Board of Chektec Corporation and Cyber
8/5/48 Scientific, Inc.
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation From
Compensation From the Fund Complex
Position Principal Occupations During the Past the Fund as of as of
Name, Address, DOB with Fund 5 years October 31, 1999 October 31, 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James P. Pappas* Board President of UAM Investment Services, 0 0
211 Congress Street Member Inc. since March 1999; Vice President UAM
Boston, MA 02110 Trust Company since January 1996;
2/24/53 Principal of UAM Fund Distributors, Inc.
since December 1995; Vice President of
UAM Investment Services, Inc. from
January 1996 to March 1999 and a Director
and Chief Operating Officer of CS First
Boston Investment Management from
1993-1995.
---------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a 0 0
One International Place Member; Director of United Asset Management
Boston, MA 02110 President Corporation; Director, Partner or Trustee
3/21/35 and of each of the Investment Companies of
Chairman the Eaton Vance Group of Mutual Funds.
---------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of 0 0
One Financial Center Member Dewey Square Investors Corporation since
Boston, MA 02111 1988; Director and Chief Executive
7/1/43 Officer of H.T. Investors, Inc., formerly
a subsidiary of Dewey Square.
---------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief 0 0
One International Place President Financial Officer of United Asset
Boston, MA 02110 Management Corporation.
9/19/47
---------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer 0 0
211 Congress Street of the Fidelity Group of Mutual Funds
Boston, MA 02110 from 1991 to 1995; held various other
7/4/51 offices with Fidelity Investments from
November 1990 to March 1995.
---------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase
Boston, MA 02110 Global Fund Services Company from 1995 to
9/18/63 1996; Senior Manager of Deloitte & Touche
LLP from 1985 to 1995,
---------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI 0 0
SEI Investments Treasurer Investments; Senior Manager at Arthur
One Freedom Valley Rd. Andersen prior to 1994.
Oaks, PA 19456
12/17/63
</TABLE>
PRINCIPAL SHAREHOLDERS
As of February 1, 2000, the following persons or organizations held of
record or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UMBSC & Co. 21.06% Sterling Partners' Balanced Institutional
FBO Interstate Brands Portfolio Class Shares
Conservative Growth
P.O. Box 419175
Kansas City, MO 64141-6175
-----------------------------------------------------------------------------------------------------------------------
Centura Bank 11.26% Sterling Partners' Balanced Institutional
P.O. Box 1220 Portfolio Class Shares
Attn: Roxanne Moore
131 N. Church Street
Rocky Mount, NC 27804-5433
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UMBSC & Co. 9.81% Sterling Partners' Balanced Institutional
FBO Interstate Brands Portfolio Class Shares
Moderate Growth
P.O. Box 419175
Kansas City, MO 64141-6175
-----------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 6.70% Sterling Partners' Balanced Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
-----------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 11.93% Sterling Partners' Equity Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
-----------------------------------------------------------------------------------------------------------------------
ENJAYCO 8.04% Sterling Partners' Equity Institutional
FBO Smith Anderson 401K Plan 90483 Portfolio Class Shares
P.O. Box 17909
Milwaukee, WI 53217-0909
-----------------------------------------------------------------------------------------------------------------------
First Citizens Bank & Trust Co. TR 5.91% Sterling Partners' Equity Institutional
FBO Sanger Clinic Portfolio Class Shares
P.O. Box 29522
Raleigh, NC 27626-0522
-----------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 18.09% Sterling Partners Small Cap Institutional
Reinvest Account Value Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
-----------------------------------------------------------------------------------------------------------------------
Northern Trust Company CUST 9.71% Sterling Partners' Small Institutional
FBO Holly Cross Employee Cap Value Portfolio Class Shares
Retirement Trust HLT Plan
P.O. Box 92956
Chicago, IL 60675-2956
-----------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co. TR 7.41% Sterling Partners' Small Institutional
Capital 401K & PSP Cap Value Portfolio Class Shares
c/o Mutual Funds UAM
P.O. Box 8971
Wilmington, DE 19890-0001
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio. As of
February 1, 2000, the directors and officers of the Fund owned less than 1%
of the outstanding shares of the portfolios.
Investment Advisory and Other Services
Investment Adviser
- --------------------------------------------------------------------------------
Sterling Capital Management Company, a North Carolina corporation located
at One First Union Center, 301 S. College Street, Suite 3200, Charlotte,
North Carolina 28202, is the investment adviser to each of the portfolios.
The adviser manages and supervises the investment of each portfolio's
assets on a discretionary basis. The adviser, an affiliate of United Asset
Management Corporation, has provided investment management services to
corporations, pension and profit sharing plans, trusts, estates and other
institutions and individuals since 1970.
29
<PAGE>
The adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds Complex.
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Fund has filed each agreement with the SEC as part
of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of a portfolio's assets;
. Continuously reviews, supervises and administers the investment program
of a portfolio; and
. Determines what portion of a portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Investment Advisory Agreement, (2) reckless disregard by the
adviser of its obligations and duties under the Investment Advisory
Agreement, or (3) a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services, the adviser shall not
be subject to any liability whatsoever to the Fund, for any error of
judgment, mistake of law or any other act or omission in the course of, or
connected with, rendering services under the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Board Members or (b) a majority of the
shareholders of the portfolio.
32
<PAGE>
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority
of Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the
Fund.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
Advisory Fees
For its services, each portfolio pays its adviser the following annual
fees, which are expressed as a percentage of the average daily net assets
of the portfolio. Due to the effect of fee waivers by the adviser, the
actual percentage of average net assets that a portfolio pays in any given
year may be different from the rate set forth in its contract with the
adviser. For the last three fiscal years, the portfolios paid the following
in management fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Paid Investment Advisory Fees Waived Total Investment Advisory Fees
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio
1999 $361,802 $111,131 $250,671
---------------------------------------------------------------------------------------------------------------------
1998 $363,308 $48,983 $314,325
---------------------------------------------------------------------------------------------------------------------
1997 $266,244 $70,708 $195,536
---------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
1999 $411,436 $104,588 $306,848
---------------------------------------------------------------------------------------------------------------------
1998 $243,325 $73,508 $169,817
---------------------------------------------------------------------------------------------------------------------
1997 $11,374 $66,275 $0
---------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
1999 $558,088 $64,548 $523,540
---------------------------------------------------------------------------------------------------------------------
1998 $608,044 $0 $608,044
---------------------------------------------------------------------------------------------------------------------
1997 $542,796 $0 $542,796
</TABLE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is
not obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services. UAMFDI, an affiliate of UAM, is located at
211 Congress Street, Boston, Massachusetts 02110.
SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------
UAM and each of its affiliates, may, at its own expense, compensate a
Service Agent or other person for marketing, shareholder servicing,
record-keeping and/or other services performed with respect to the Fund or
the portfolio. The person making such payments may do so out of its
revenues, its profits or any other source available to it. Such services
arrangements, when in effect, are made generally available to all qualified
service providers. The adviser may also compensate its affiliated companies
for referring investors to the portfolio.
33
<PAGE>
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend
disbursing and transfer agent services for the Fund. UAMFSI, an affiliate
of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if
the Board specifically approves such continuance every year. The Board or
UAMFSI may terminate the Fund Administration Agreement, without penalty, on
not less than ninety (90) days' written notice. The Fund Administration
Agreement automatically terminates upon its assignment by UAMFSI without
the prior written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in
performing its duties under the Fund Administration Agreement. Such people
may be officers and employees who are employed by both UAMFSI and the Fund.
UAMFSI will pay such people for such employment. The Fund will not incur
any obligations with respect to such people.
34
<PAGE>
Administration and Transfer Agency Services Fees
Each portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, a portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio
at the following rates:
<TABLE>
<CAPTION>
Annual Rate
--------------------------------------------------------------------------------------------------------------
<S> <C>
Equity Portfolio 0.063%
--------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 0.043%
--------------------------------------------------------------------------------------------------------------
Balanced Portfolio 0.063%
</TABLE>
2. Each portfolio also pays a fee to UAMFSI for sub-administration and
other services provided by SEI. The fee, which UAMFSI pays to SEI, is
calculated at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM
Funds Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its
services as transfer agent and dividend-disbursing agent equal to
$10,500 for the first operational class and $10,500 for each
additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as
sub-shareholder-servicing agent equal to $7,500 for the first
operational class and $2,500 for each additional class.
For the last three fiscal years the portfolios paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Total Administration
Administrators Fee Sub-Administrators Fee Fee
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio
1999 $39,049 $71,925 $110,974
-------------------------------------------------------------------------------------------------------------------------
1998 $35,899 $77,210 $113,109
-------------------------------------------------------------------------------------------------------------------------
1997 $26,971 $76,637 $103,608
-------------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
1999 $25,532 $68,387 $93,919
-------------------------------------------------------------------------------------------------------------------------
1998 $15,483 $66,555 $82,038
-------------------------------------------------------------------------------------------------------------------------
1997 $3,106 $27,344 $30,450
-------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
1999 $56,040 $81,638 $137,678
-------------------------------------------------------------------------------------------------------------------------
1998 $51,575 $82,561 $134,136
-------------------------------------------------------------------------------------------------------------------------
1997 $43,421 $81,424 $124,845
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York
11245, provides for the custody of the Fund's assets pursuant to the terms
of a custodian agreement with the Fund.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Fund.
35
<PAGE>
BROKERAGE ALLOCATION AND OTHER PRACTICES
SELECTION OF BROKERS
- --------------------------------------------------------------------------------
Each Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect
to all transactions for the portfolio. The adviser may select brokers based
on research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and
not instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes
it is reasonable to do so in light of the value of the research,
statistical, and pricing services provided by the broker effecting the
transaction.
It is not the practice of the Fund to allocate brokerage or effect
principal transactions with dealers based on sales of shares that a
broker-dealer firm makes. However, the Fund may place trades with qualified
broker-dealers who recommend the Fund or who act as agents in the purchase
of Fund shares for their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for each portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the
same security for more than one client. The adviser strives to allocate
such transactions among its clients, including the portfolios, in a fair
and reasonable manner. Although there is no specified formula for
allocating such transactions, the Fund's governing board periodically
reviews the various allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect
a dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When a portfolio executes
transactions in the over-the-counter market, it will deal with primary
market makers unless prices that are more favorable are otherwise
obtainable.
36
<PAGE>
Commissions Paid
For the last three fiscal years, the portfolios paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
-----------------------------------------------------------------------------------------------------------
<S> <C>
Equity Portfolio
1999 $132,831
-----------------------------------------------------------------------------------------------------------
1998 $93,953
-----------------------------------------------------------------------------------------------------------
1997 $87,354
-----------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio
1999 $134,535
-----------------------------------------------------------------------------------------------------------
1998 $163,245
-----------------------------------------------------------------------------------------------------------
1997 $54,402
-----------------------------------------------------------------------------------------------------------
Balanced Portfolio
1999 $134,507
-----------------------------------------------------------------------------------------------------------
1998 $89,004
-----------------------------------------------------------------------------------------------------------
1997 $110,763
</TABLE>
CAPITAL STOCK AND OTHER SECURITIES
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its
name to "UAM Funds, Inc." The Fund's principal executive office is located
at 211 Congress Street, Boston, MA 02110; however, shareholders should
direct all correspondence to the address listed on the cover of this SAI.
The Fund is an open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing
board to issue three billion shares of common stock, with a $.001 par
value. The governing board has the power to create and designate one or
more series (portfolios) or classes of shares of common stock and to
classify or reclassify any unissued shares at any time and without
shareholder approval. When issued and paid for, the shares of each series
and class of the Fund are fully paid and nonassessable, and have no
pre-emptive rights or preference as to conversion, exchange, dividends,
retirement or other features.
The shares of each series and class have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of members of the governing board can elect all of the members if
they choose to do so. On each matter submitted to a vote of the
shareholders, a shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing
in his name on the books of the Fund. Shares of all classes will vote
together as a single class except when otherwise required by law or as
determined by the members of the Fund's governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. The liquidation of any
portfolio or class thereof may be authorized at any time by vote of a
majority of the members of the governing board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are
identical in all respects.
37
<PAGE>
Unlike Institutional and Adviser Class Shares, Institutional Service Class
Shares bear certain expenses related to shareholder servicing and the
distribution of such shares and have exclusive voting rights with respect
to matters relating to such distribution expenditures. The Adviser Class
Shares impose a sales load on purchases. The classes also have different
exchange privileges. The net income attributable to Institutional Service
Class Shares and the dividends payable on Institutional Service Class
Shares will be reduced by the amount of the shareholder servicing and
distribution fees; accordingly, the net asset value of the Institutional
Service Class Shares will be reduced by such amount to the extent a
portfolio has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
FEDERAL TAXES
Each portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income
to shareholders each year so that the portfolio itself generally will be
relieved of federal income and excise taxes. If a portfolio were to fail to
so qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would
be taxed as if they received ordinary dividends, although corporate
shareholders could be eligible for the dividends received deduction.
A portfolios' dividends that are paid to their corporate shareholders and
are attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Net Asset Value Per Share
- --------------------------------------------------------------------------------
38
<PAGE>
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to
the NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result
by the total number of shares outstanding. For purposes of this
calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on
the NYSE every day the NYSE is open for trading. The NYSE usually closes at
4:00 p.m. The NYSE is closed on the following days: New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
39
<PAGE>
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the Fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "How the Fund Values it Assets"
at the next determination of net asset value after acceptance. The Fund
will issue shares of the portfolio at the NAV of the portfolio determined
as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and
that there are no restrictions on their resale imposed by the 1933 Act
or otherwise;
. All dividends, interest, subscription, or other rights pertaining to
such securities become the property of the portfolio and are delivered
to the fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all
securities of the same issuer held by the portfolio cannot exceed 5%
of the net assets of the portfolio. This condition does not apply to
U.S. government securities.
Investors who are subject to Federal taxation upon exchange may realize a
gain or loss for federal income tax purposes depending upon the cost of
securities or local currency exchanged. Investors interested in such
exchanges should contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you
paid for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of
shares or dollar amount the shareholder wishes to redeem signed by all
registered owners of the shares in the exact names in which they are
registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts,
guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.
By Telephone
40
<PAGE>
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to
receive redemption proceeds. To change an account in this manner, you
must submit a written request signed by each shareholder, with each
signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable
for any losses if they fail to do so. These procedures include requiring
the investor to provide certain personal identification at the time an
account is opened and before effecting each transaction requested by
telephone. In addition, all telephone transaction requests will be recorded
and investors may be required to provide additional telecopied written
instructions of such transaction requests. The Fund or UAMSSC may be liable
for any losses due to unauthorized or fraudulent telephone instructions if
the Fund or the UAMSSC does not employ the procedures described above.
Neither the Fund nor the UAMSSC will be responsible for any loss,
liability, cost or expense for following instructions received by telephone
that it reasonably believes to be genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment
of redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid
in whole or in part, in investment securities or in cash, as the Board may
deem advisable; however, payment will be made wholly in cash unless the
governing board believes that economic or market conditions exist which
would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be
valued as set forth under "Valuation of Shares." A redeeming shareholder
would normally incur brokerage expenses if these securities were converted
to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-
41
<PAGE>
dealers guaranteeing signatures must be a member of a clearing corporation
or maintain net capital of at least $100,000. Credit unions must be
authorized to issue signature guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will
pay your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of
the Commission as a result of which it is not reasonably practicable
for the portfolio to dispose of securities owned by it, or to fairly
determine the value of its assets; or
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
Performance Calculations
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. The performance is calculated separately
for each portfolio.
40
<PAGE>
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in a portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a
stated period. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative
total return if performance had been constant over the entire period.
The fund calculates the average annual total return of a portfolio by
finding the average annual compounded rates of return over one, five and
ten-year periods that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes
the amount was completely redeemed at the end of each one, five and
ten-year period and the deduction of all applicable Fund expenses on an
annual basis. Since Institutional Service Class Shares bear additional
service and distribution expenses, their average annual total return will
generally be lower than that of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the
end of the 1, 5 or 10 year periods (or fractional portion
thereof).
Set forth in the table below are the portfolios' average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from a
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of
10 Years or
One Year Five Years Since Inception Inception Date
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Portfolio 9.94% 17.20% 13.76% 5/15/91
--------------------------------------------------------------------------------------------------------------------
Small Cap Value Portfolio 9.02% N/A 11.08% 1/2/97
--------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 5.12% 12.62% 10.26% 3/15/91
--------------------------------------------------------------------------------------------------------------------
</TABLE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in a portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds.
As this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during
the base period. Since Institutional Service Class shares bear additional
service and distribution expenses, their yield will generally be lower than
that of the Institutional Class Shares.
41
<PAGE>
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
COMPARISONS
- --------------------------------------------------------------------------------
A portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data
reported in financial and industry publications, and various indices as
further described in this SAI. This information may also be included in
sales literature and advertising.
To help investors better evaluate how an investment in a portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various
financial publications. Advertisements may also compare performance (as
calculated above) to performance as reported by other investments, indices
and averages. Please see "Comparative Benchmarks" for publications, indices
and averages that may be used.
In assessing such comparisons of performance, an investor should keep in
mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in a
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by a portfolio to calculate its
performance; and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that a portfolio will continue this
performance as compared to such other averages.
Financial Statements
The following documents are included in the portfolios' October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
42
<PAGE>
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser to each portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
Bond Ratings
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within
the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will
remain relatively well-maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-
medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classification,
earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
43
<PAGE>
baa An issue that which is rated "baa" is considered to be a
medium--grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate
at present but may be questionable over any great length of
time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not
well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue
over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payments.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can thus be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each
minus (-) rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking and the
modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
44
<PAGE>
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con. (...)
(This rating applies only to U.S. Tax-Exempt Municipals) Bonds
for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Prime-1
Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
. Leading market positions in well-established industries.
. Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
. Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
45
<PAGE>
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligation. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the
level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior
obligations are typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy, as noted above. Accordingly,
in the case of junior debt, the rating may not conform exactly with the
category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is extremely strong.
AA An obligation rated `AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to
meet its financial commitment on the obligation is very
strong.
A An obligation rated `A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories.
However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the
obligation.
Obligations rated 'BB', 'B', `CCC', `CC' and `C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and `C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
46
<PAGE>
BB An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing
uncertainties or exposures to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC An obligation rated `CCC' is currently vulnerable to non-
payment, and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial
commitment on the obligations.
CC An obligation rated `CC' is currently highly vulnerable to
nonpayment.
C
A subordinated debt or preferred stock obligation rated `C' is
CURENTLY HIGHLY VULNERABLE to non-payment. The `C' rating may
be used to cover a situation where a bankruptcy petition has
been filed or similar action taken, but payments on this
obligation are being continued. A `C' will also be assigned to
a preferred stock issue in arrears on dividends or sinking
fund payments, but that is currently paying.
D An obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The `D' rating also
will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are
jeopardized.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal
or volatility of expected returns which are not addressed in
the credit rating. Examples include: obligation linked or
indexed to equities, currencies, or commodities; obligations
exposed to severe prepayment risk- such as interest-only or
principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
N.R. This indicates that no rating has been requested, that there
is insufficient information on which to base a rating, or
that Standard & Poor's does not rate a particular obligation
as a matter of policy.
Plus (+) or minus (-): The ratings from `AA' to `CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet
its financial commitment on these obligations is extremely
strong.
A-2 A short-term obligation rated 'A-2' is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
47
<PAGE>
A-3 A short-term obligation rated 'A-3' exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on
the obligation.
B A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated `C' is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
D A short-term obligation rated `D' is in payment default. The
`D' rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period
has not expired, unless Standard & Poors' believes that such
payments will be made during such grace period. The `D' rating
also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation
are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment
is a key factor in this analysis. An obligor's capacity to repay foreign
currency obligations may be lower than its capacity to repay obligations in
its local currency due to the sovereign government's own relatively lower
capacity to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to specific
issues. Foreign currency issuer ratings are also distinguished from local
currency issuer ratings to identity those instances where sovereign risks
make them different for the same issuer.
DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of
economic conditions.
A+/A/A- Protection factors are average but adequate. However, risk
factors are more variable in periods of greater economic
stress.
BBB+/BBB Below-average protection factors but still considered
BBB- sufficient for prudent investment. Considerable variability in
risk during economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations
BB- when due. Present or prospective financial protection factors
fluctuate according to industry conditions. Overall quality
may move up or down frequently within this category.
B+/B/B- Below investment grade and possessing risk that obligation
will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into a
higher or lower rating grade.
48
<PAGE>
CCC Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal, interest
or preferred dividends. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments. DP Preferred stock with
dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
49
<PAGE>
AA Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity
for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility
of credit risk developing, particularly as the result of
adverse economic change over time; however, business or
financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are
not investment grade.
B Highly speculative. `B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A `CC'
rating indicates that default of some kind appears probable.
`C' ratings signal imminent default.
DDD,DD,D Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated
with any precision, the following serve as general guidelines.
"DDD" obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest.
"D" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some
or all of their obligations. Entities rated "DDD" have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated "D" have a poor prospect for
repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for timely
payment of financial commitments; may have an added "+" to
denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety is
not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse
changes could result in a reduction to non-investment grade.
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B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes
in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' long-term
rating category, to categories below `CCC', or to short-term ratings other
than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically
resolved over a relatively short period.
Comparative Benchmarks
(alphabetically)
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of change, over time in
the price of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market
fund yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on
the New York Stock Exchange. It has been a widely followed indicator of the
stock market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times,
Global Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New
York Times, Personal Investor, The Wall Street Journal and Weisenberger
Investment Companies Service -- publications that rate fund performance
over specified time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
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IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-
weighted index maintained by the International Finance Corporation. This
index consists of over 890 companies in 26 emerging equity markets, and is
designed to measure more precisely the returns portfolio managers might
receive from investment in emerging markets equity securities by focusing
on companies and markets that are legally and practically accessible to
foreign investors.
Lehman Brothers Indices:
-----------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market
value-weighted index that combines the Lehman Government/Corporate Index
and the Lehman Mortgage-Backed Securities Index, and includes treasury
issues, agency issues, corporate bond issues and mortgage backed
securities. It includes fixed rate issuers of investment grade (BBB) or
higher, with maturities of at least one year and outstanding par values of
at least $100 million for U.S. government issues and $25 million for
others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate
debt. Also included are yankee bonds, which are dollar-denominated SEC
registered public, noncovertible debt issued or guaranteed by foreign
sovereign governments, municipalities, or governmental agencies, or
international agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower
bonds and foreign-targeted issues, and the Agency Bond Index (all publicly
issued debt of U.S. government agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. government). In addition to the
aggregate index, sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed
income market value-weighted index that combines the Government and
Corporate Bond Indices, including U.S. government treasury securities,
corporate and yankee bonds. All issues are investment grade (BBB) or
higher, with maturities of at least one year and outstanding par value of
at least $100 million of U.S. government issues and $25 million for others.
Any security downgraded during the month is held in the index until month
end and then removed. All returns are market value weighted inclusive of
accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate,
non-investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity
and an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged
fixed income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of
all fixed-rate securities backed by mortgage pools of Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30
largest mutual funds within their respective portfolio investment
objectives. The indices are currently grouped in six categories: U.S.
Diversified Equity with 12 indices; Equity with 27 indices, Taxable
Fixed-Income with 20 indices, Tax-Exempt Fixed-Income with 28 indices,
Closed-End Funds with 16 indices, and Variable Annuity Funds with 18
indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment
objectives were changed while other equity objectives remain unchanged.
Changing investment objectives include Capital Appreciation Funds, Growth
Funds, Mid-Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income
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Funds, and Equity Income Funds. Unchanged investment objectives include
Sector Equity Funds, World Equity Funds, Mixed Equity Funds, and certain
other funds including all Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in
group; 2) number of component funds remains the same (30); 3) component
funds are defined annually; 4) can be linked historically; and 5) are used
as a benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers,
liquidations, etc.; and 4) will be inaccurate if historical averages are
linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include,
but are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an
average of 100 funds that invest at least 65% of assets in investment grade
debt issues (BBB or higher) with dollar-weighted average maturities of one
to five years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds
whose primary objective is to conserve principal by maintaining at all
times a balanced portfolio of both stocks and bonds. Typically, the
stock/bond ratio ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing
60% or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest
funds by asset size which invest in companies with long-term earnings
expected to grow significantly faster than the earnings of the stocks
represented in the major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions,
exclusive of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an
unmanaged index composed of U.S. treasuries, agencies and corporates with
maturities from 1 to 4.99 years. Corporates are investment grade only (BBB
or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market
value-weighted averages of the performance of over 900 securities listed on
the stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign
common stocks and ADRs.
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Nekkei Stock Average - a price weighted index of 225 selected leading
stocks listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
---------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance
of the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance
of the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000
Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of
the total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of
the total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance
of the 2,5000 smallest companies in the Russell 3000 Index, which
represents approximately 17% of the total market capitalization of the
Russell 3000 Index.
Russell 3000(R) Growth Index - measures the performance of those Russell
3000 Index companies with higher price-to-book ratios and higher forecasted
growth values. The stocks in this index are also members of either the
Russell 1000 Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell
3000 Index companies with lower price-to-book ratios and lower forecasted
growth values. The stocks in this index are also members of either the
Russell 1000 Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell
1000 companies with higher price-to-book ratios and higher forecasted
growth values.
Russell 1000(R) Value Index - measures the performance of those Russell
1000 with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted
growth values.
Russell 2000(R) Value Index - measures the performance of those Russell
2000 companies with lower price-to-book ratios and lower forecasted growth
values.
Russell Top 200(TM) Growth Index - measures the performance of those
Russell Top 200 companies with higher price-to-book ratios and higher
forecasted growth values. The stocks re also members of the Russell 1000
Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted
growth values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted
growth values. The stocks are also members of the Russell 1000 Growth
index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted
growth values. The stocks are also members of the Russell 1000 Value index.
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Russell 2500(TM) Growth Index - measures the performance of those Russell
2500 companies with higher price-to-book ratios and higher forecasted
growth values.
Russell 2500(TM) Value Index - measures the performance of those Russell
2500 companies with lower price-to-book ratios and lower forecasted growth
values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of
$1 million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and
does not reflect any transaction costs. Direct investment in the index is
not possible.
Standard & Poor's U.S. Indices:
------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital
International launched a new global industry classification standard
consisting of 10 economic sectors aggregated from 23 industry groups, 59
industries, and 123 sub-industries covering almost 6,000 companies
globally. The new classification standard will be used with all of their
respective indices. Features of the new classification include 10 economic
sectors, rather than the 11 S&P currently uses. Sector and industry
gradations are less severe. Rather than jumping from 11 sectors to 115
industries under the former S&P system, the new system progresses from 10
sectors through 23 industry groups, 50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its
market value. It is used by over 95% of U.S. managers and pension plan
sponsors. More than $25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic
stocks chosen for market size, liquidity, and industry group
representation. The index is comprised of stocks from the industrial,
utility, financial, and transportation sectors. It is gaining wide
acceptance as the preferred benchmark for both active and passive
management due to its low turnover and greater liquidity. Approximately $8
billion is indexed to the S&P SmallCap 600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap
600 indices, representing 87% of the total U.S. equity market
capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the
market performance of U.S. Real Estate Investment Trusts, known as REITS.
The REIT Composite consists of 100 REITs chosen for their liquidity and
importance in representing a diversified real estate portfolio. The Index
covers over 80% of the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including
23 electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
--------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
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<PAGE>
S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
--------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as
Denmark, Norway, Sweden and Switzerland. The S&P Euro Plus Index contains
200 constituents, and the S&P Euro Index, a subset of Euro Plus, contains
160 constituents. Both indices provide geographic and economic diversity
over 11 industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed
as the new Canadian large cap benchmark and will ultimately replace the
Toronto 35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure
liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each
major economic sector of major Asia-Pacific equity markets. Seven countries
-- Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and
Taiwan -- are represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes
highly liquid securities from major economic sectors of Mexican and South
American equity markets. Companies from Mexico, Brazil, Argentina, and
Chile are represented in the new index.
S&P United Kingdom 150 Index - includes 150 highly liquid securities
selected from each of the new S&P sectors. The S&P UK 150 is designed to be
broad enough to provide representation of the market, but narrow enough to
ensure liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged
index comprised of the smallest stocks (less than $1 billion market
capitalization) of the Extended Market Index, of both developed and
emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill
issues.
Savings and Loan Historical Interest Rates -- as published by the U.S.
Savings and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and
inflation.
Target Large Company Value Index - an index comprised of large companies
with market capitalizations currently extending down to approximately $1.9
billion that are monitored using a variety of relative value criteria in
order to capture the most attractive value opportunities available. A high
quality profile is required and companies undergoing adverse financial
pressures are eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all
treasury bills for the previous three month period.
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Value Line Composite Index -- composed of over 1,600 stocks in the Value
Line Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted
index of publicly traded real estate securities, including real estate
investment trusts, real estate operating companies and partnerships. The
index is used by the institutional investment community as a broad measure
of the performance of public real estate equity for asset allocation and
performance comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs)
but excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment
of dividends, except as otherwise stated.
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UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
The TS&W Portfolios
TS&W Equity Portfolio
TS&W International Equity Portfolio
TS&W Fixed Income Portfolio
TS&W Balanced Portfolio
Institutional Class Shares
Statement of Additional Information
February 28, 2000
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the portfolios dated
February 28, 2000, as supplemented from time to time. You may obtain a
prospectus for the portfolios by contacting the UAM Funds at the address
listed above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments................................. 1
What Investment Strategies May the Portfolios Use?.................. 1
Debt Securities..................................................... 2
Derivatives......................................................... 9
Equity Securities................................................... 17
Foreign Securities.................................................. 18
Investment Companies................................................ 22
Repurchase Agreements............................................... 22
Restricted Securities............................................... 22
Securities Lending.................................................. 23
When Issued Transactions............................................ 23
Investment Policies of the Portfolios................................ 24
Fundamental Policies................................................ 24
Non-Fundamental Policies............................................ 26
Management Of The Fund............................................... 27
Principal Shareholders............................................... 28
Investment Advisory and Other Services............................... 29
Investment Adviser.................................................. 29
Distributor......................................................... 32
Shareholder Servicing Arrangements.................................. 32
Administrative Services............................................. 32
Custodian........................................................... 34
Independent Accountants............................................. 34
Brokerage Allocation and Other Practices............................. 34
Selection of Brokers................................................ 34
Simultaneous Transactions........................................... 35
Brokerage Commissions............................................... 35
Capital Stock and Other Securities................................... 36
Description Of Shares And Voting Rights............................. 36
Purchase, Redemption and Pricing of Shares........................... 37
Net Asset Value Per Share........................................... 37
Purchase of Shares.................................................. 38
Redemption of Shares................................................ 39
Exchange Privilege.................................................. 41
Transfer Of Shares.................................................. 41
Performance Calculations............................................. 41
Total Return........................................................ 41
Yield............................................................... 42
Comparisons......................................................... 42
Financial Statements................................................. 43
Glossary............................................................. 43
Bond Ratings......................................................... 44
Moody's Investors Service, Inc...................................... 44
Standard & Poor's Ratings Services.................................. 46
Duff & Phelps Credit Rating Co...................................... 49
Fitch IBCA Ratings.................................................. 50
Comparative Benchmarks............................................... 51
</TABLE>
<PAGE>
Description of Permitted Investments
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIOS USE?
- --------------------------------------------------------------------------------
The portfolios currently intend to use the securities and investment
strategies listed below in seeking their objectives; however, they may at any
time invest in any of the investment strategies described in this SAI. This
SAI describes each of these investments/strategies and their risks. A
portfolio may not notify shareholders before employing new strategies, unless
it expects such strategies to become principal strategies. The investments
that are italicized are principal strategies and you can find more information
on these techniques in the prospectus of the portfolio. You can find more
information concerning the limits on the ability of the portfolios to use
these investments in "What Are the Investment Policies of the Portfolios?"
Equity Portfolio
. Equity securities.
. Short-term investments.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
International Equity Portfolio
. Foreign securities.
. Equity securities.
. Short-term investments.
. Futures.
. Options.
. Swaps.
. Forward currency exchange contracts.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Fixed Income Portfolio
. Foreign securities.
. Debt securities.
. Investment companies.
1
<PAGE>
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
Balanced Portfolio
. Foreign securities.
. Equity securities.
. Debt securities.
. Investment companies.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When issued securities.
DEBT SECURITIES
- --------------------------------------------------------------------------------
Corporations and governments use debt securities to borrow money from
investors. Most debt securities promise a variable or fixed rate of return
and repayment of the amount borrowed at maturity. Some debt securities, such
as zero-coupon bonds, do not pay current interest and are purchased at a
discount from their face value.
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the U.S. Treasury has issued
(treasury securities) and securities that a federal agency or a government-
sponsored entity has issued (agency securities). Treasury securities include
treasury notes, which have initial maturities of one to ten years and treasury
bonds, which have initial maturities of at least ten years and certain types
of mortgage-backed securities that are described under "Mortgage-Backed
Securities" and "Other Asset-Backed Securities." This SAI discusses mortgage-
backed treasury and agency securities in detail in the section called
"Mortgage-Backed Securities" and "Other Asset-Backed Securities."
The full faith and credit of the U.S. government supports treasury securities.
Unlike treasury securities, the full faith and credit of the U.S. government
generally do not back agency securities. Agency securities are typically
supported in one of three ways:
. by the right of the issuer to borrow from the U.S. Treasury;
. by the discretionary authority of the U.S. government to buy the
obligations of the agency; or
. by the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the
credit risk is minimal. The U.S. government does not guarantee the net asset
value of the assets of a portfolio.
2
<PAGE>
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors,
the corporation promises to pay investors interest, and repay the principal
amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Since homeowners usually have the option of paying either part or
all of the loan balance before maturity, the effective maturity of a mortgage-
backed security is often shorter than is stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guarantee the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The adviser will consider
such insurance and guarantees and the creditworthiness of the issuers thereof
in determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or guarantors will
not meet their obligations under the insurance policies or guarantee
arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the full faith and credit of the U.S.
government backs them. GNMA guarantees the timely payment of principal and
interest on securities issued by institutions approved by GNMA and backed by
pools of FHA-insured or VA-guaranteed mortgages. GNMA does not guarantee the
market value or yield of mortgage-backed securities or the value of a
portfolio's shares. To buy GNMA securities, a portfolio may have to pay a
premium over the maturity value of the underlying mortgages, which the
portfolio may lose if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Securities issued by FNMA are agency securities,
which means FNMA, but not the U.S. government, guarantees their timely payment
of principal and interest.
Federal Home Loan Mortgage Corporation (FHLMC)
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FHLMC is a corporate instrumentality of the U.S. government whose stock is
owned by the twelve Federal Home Loan Banks. Congress created FHLMC in 1970
to increase the availability of mortgage credit for residential housing. FHLMC
issues Participation Certificates (PCs) which represent interests in
conventional mortgages. Like FNMA, FHLMC guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the
full faith and credit of the U.S. government.
Commercial Banks, Savings And Loan Institutions, Private Mortgage Insurance
Companies, Mortgage Bankers and other Secondary Market Issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these issuers
generally offer a higher rate of interest than pools created by GNMA, FNMA &
FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant
differences are mortgage-backed securities:
. payments of interest and principal are more frequent (usually monthly); and
. falling interest rates generally cause individual borrowers to pay off
their mortgage earlier than expected forcing a portfolio to reinvest the
money at a lower interest rate.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, a portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgages, such as automobile loans, computer leases and credit card
receivables. Like mortgage-backed securities, these securities are pass-
through. In general, the collateral supporting these securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which allow debtors
to reduce their balances by offsetting certain amounts owed on the credit
cards. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such receivables to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities. Due
to the quantity of vehicles involved and requirements under state laws, asset-
backed securities backed by automobile receivables may not have a proper
security interest in all of the obligations backing such receivables.
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To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
A portfolio may also invest in residual interests in asset-backed securities,
which is the excess cash flow remaining after making required payments on the
securities and paying related administrative expenses. The amount of residual
cash flow resulting from a particular issue of asset-backed securities depends
in part on the characteristics of the underlying assets, the coupon rates on
the securities, prevailing interest rates, the amount of administrative
expenses and the actual prepayment experience on the underlying assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepay principal
monthly. While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its assets
in the short-term securities listed below, U.S. government securities and
investment-grade corporate debt securities. Unless otherwise specified, a
short-term debt security has a maturity of one year or less.
Bank Obligations
A portfolio will only invest in a security issued by a commercial bank if the
bank:
. has total assets of at least $1 billion, or the equivalent in other
currencies;
. is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
. is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
A portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
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Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments
are unsecured and usually discounted. A portfolio may invest in commercial
paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue
rated A or better by Moody's or by S&P. See "Bond Ratings" for a description
of commercial paper ratings.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities are derivative multiple-class mortgage-
backed securities. Stripped mortgage-backed securities usually have two
classes that receive different proportions of interest and principal
distributions on a pool of mortgage assets. Typically, one class will receive
some of the interest and most of the principal, while the other class will
receive most of the interest and the remaining principal. In extreme cases,
one class will receive all of the interest ("interest only" or "IO" class)
while the other class will receive the entire principal sensitive to the rate
of principal payments (including prepayments) on the underlying mortgage loans
or mortgage-backed securities. A rapid rate of principal payments may
adversely affect the yield to maturity of IOs. Slower than anticipated
prepayments of principal may adversely affect the yield to maturity of a PO.
The yields and market risk of interest only and principal only stripped
mortgage-backed securities, respectively, may be more volatile than those of
other fixed income securities, including traditional mortgage-backed
securities.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which
are not typically associated with investing in domestic securities. See
"FOREIGN SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold
at a discount from their face value. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. The amount of the
discount rate varies depending on factors including the time remaining until
maturity, prevailing interest rates, the security's liquidity and the issuer's
credit quality. The market value of zero coupon securities may exhibit greater
price volatility than ordinary debt securities because a stripped security
will have a longer duration than an ordinary debt security with the same
maturity. A portfolio's investments in pay-in-kind, delayed and zero coupon
bonds may require it to sell certain of its portfolio securities to generate
sufficient cash to satisfy certain income distribution requirements.
These securities may include treasury securities that have had their interest
payments ("coupons") separated from the underlying principal ("corpus") by
their holder, typically a custodian bank or investment brokerage firm. Once
the holder of the security has stripped or separated corpus and coupons, it
may sell each component separately. The principal or corpus is then sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. Typically, the coupons are
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sold separately or grouped with other coupons with like maturity dates and
sold bundled in such form. The underlying treasury security is held in book-
entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," a portfolio can record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead, it
calculates its weighted average maturity. This number is an average of the
stated maturity of each debt security held by a portfolio, with the maturity
of each security weighted by the percentage of the assets of the portfolio it
represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or a portfolio that invests in debt securities, to changes in
interest rates. It measures sensitivity more accurately than maturity because
it takes into account the time value of cash flows generated over the life of
a debt security. Future interest payments and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years --
the duration. Effective duration takes into account call features and sinking
fund prepayments that may shorten the life of a debt security.
An effective duration of 4 years, for example, would suggest that for each 1%
reduction in interest rates at all maturity levels, the price of a security is
estimated to increase by 4%. An increase in rates by the same magnitude is
estimated to reduce the price of the security by 4%. By knowing the yield and
the effective duration of a debt security, one can estimate total return based
on an expectation of how much interest rates, in general, will change. While
serving as a good estimator of prospective returns, effective duration is an
imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
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Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. A
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of a portfolio. If
left unattended, drifts in the average maturity of a portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of a portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of debt securities as compensation for
assuming risk, although short-term Treasury securities, such as 3-month
treasury bills, are considered "risk free." Corporate securities offer higher
yields than Treasury securities because their payment of interest and complete
repayment of principal is less certain. The credit rating or financial
condition of an issuer may affect the value of a debt security. Generally,
the lower the quality rating of a security, the greater the risks that the
issuer will fail to pay interest and return principal. To compensate investors
for taking on increased risk, issuers with lower credit ratings usually offer
their investors a higher "risk premium" in the form of higher interest rates
above comparable Treasury securities.
Changes in investor confidence regarding the certainty of interest and
principal payments of a corporate debt security will result in an adjustment
to this "risk premium." Since an issuer's outstanding debt carries a fixed
coupon, adjustments to the risk premium must occur in the price, which effects
the yield to maturity of the bond. If an issuer defaults or becomes unable to
honor its financial obligations, the bond may lose some or all of its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause a portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Moody's Investor
Services ("Moody's"), Standard and Poor's Ratings Services ("S&P"), Duff &
Phelps Rating Co. and Fitch IBCA. Credit ratings are only an agency's opinion,
not an absolute standard of quality, and they do not reflect an evaluation of
market risk.
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The section "Bond Ratings" contains further information concerning the ratings
of certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time a portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. A portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. Investors can use
derivatives to gain exposure to various markets in a cost efficient manner, to
reduce transaction costs or to remain fully invested. They may also invest in
derivatives to protect it from broad fluctuations in market prices, interest
rates or foreign currency exchange rates. Investing in derivatives for these
purposes is known as "hedging." When hedging is successful, the portfolio will
have offset any depreciation in the value of its portfolio securities by the
appreciation in the value of the derivative position. Although techniques
other than the sale and purchase of derivatives could be used to control the
exposure of the portfolio to market fluctuations, the use of derivatives may
be a more effective means of hedging this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party sells
and the other party agrees to buy a specified amount of a financial instrument
at an agreed upon price and time. The financial instrument underlying the
contract may be a stock, stock index, bond, bond index, interest rate, foreign
exchange rate or other similar instrument. Agreeing to buy the underlying
financial information is called buying a futures contract or taking a long
position in the contract. Likewise, agreeing to sell the underlying financial
instrument is called selling a futures contract or taking a short position in
the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit "initial margin" with a futures broker, known as a futures commission
merchant, when they enter into the contract. Initial margin deposits are
typically equal to a percentage of the contract's value. After they open a
futures contract, the parties to the transaction must compare the purchase
price of the contract to its daily market value. If the value of the futures
contract changes in such a way that a party's position declines, that party
must make additional "variation margin" payments so that the margin payment is
adequate. On the other hand, the value of the contract may change in such a
way that there is excess margin on deposit, possibly entitling the party that
has a gain to receive all or a portion of this amount. This process is known
as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the sale price upon closing out the contract is less than the
original purchase price, the person closing out the contract will realize a
loss. If the sale price upon closing out the contract is more that the
original purchase price, the person closing out the contract will realize a
gain. The opposite is also true. If the purchase price upon closing out the
contract is more than
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the original sale price, the person closing out the contract will realize a
loss. If the purchase price upon closing out the contract is less than the
original sale price, the person closing out the contract will realize a gain.
The portfolio will incur commission expenses in either opening, closing or
possibly opening and closing futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the exercise price
plus the premium paid and related transaction costs. Otherwise, the portfolio
would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
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When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may cancel
an over-the-counter option by entering into an offsetting transaction with the
counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put option
to expire and the premium it received to offset the increase in the security's
value. If security prices remain the same over time, the portfolio would hope
to profit by closing out the put option at a lower price. If security prices
fall, the portfolio may lose an amount of money equal to the difference
between the value of the security and the premium it received. Writing covered
put options may deprive the portfolio of the opportunity to profit from a
decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract;
. A call option on the same security or index with the same or lesser
exercise price;
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices;
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract;
or
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price;
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices; or
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash settlement
payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security.
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Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option).
If the option is exercised, the parties will be subject to the futures
contracts. In addition, the writer of an option on a futures contract is
subject to initial and variation margin requirements on the option position.
Options on futures contracts are traded on the same contract market as the
underlying futures contract.
The buyer or seller of an option on a futures contract may terminate the
option early by purchasing or selling an option of the same series (i.e., the
same exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
trader's profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead
of selling or buying futures contracts. The portfolio may buy a put option on
a futures contract for the same reasons it would sell a futures contract. It
also may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures
contracts, such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the portfolio would retain the option premium, which would offset, in part,
any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase
of the futures contracts, except that, if the market price declines, the
portfolio would pay more than the market price for the underlying instrument.
The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded only on exchanges regulated by the CFTC.
. Do not require an initial margin deposit.
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. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Swaps, Caps, Collars and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing rates,
security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the
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portfolio, the portfolio must be prepared to make such payments when due. In
addition, if the counter-party's creditworthiness declined, the value of a
swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the
prior written consent of the other party. The portfolio may be able to
eliminate its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counter-party is unable to
meet its obligations under the contract, declares bankruptcy, defaults or
becomes insolvent, the portfolio may not be able to recover the money it
expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the SEC. If the portfolio enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the portfolio's accrued obligations under the
swap agreement over the accrued amount the portfolio is entitled to receive
under the agreement. If the portfolio enters into a swap agreement on other
than a net basis, it will segregate assets with a value equal to the full
amount of the portfolio's accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of interest
rate cash flow on specified dates in the future. Some of the different types
of interest rate swaps are "fixed-for floating rate swaps," "termed basis
swaps" and "index amortizing swaps." Fixed-for floating rate swap involve the
exchange of fixed interest rate cash flows for floating rate cash flows.
Termed basis swaps entail cash flows to both parties based on floating
interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the portfolio enters into a swap where it agrees to exchange a
floating rate of interest for a fixed rate of interest, the portfolio may have
to pay more money than it receives. Similarly, if the portfolio enters into a
swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the portfolio may receive less money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in which
one party agrees to make interest rate payments in one currency and the other
promises to make interest rate payments in another currency. A portfolio may
enter into a currency swap when it has one currency and desires a different
currency. Typically the interest rates that determine the currency swap
payments are fixed, although occasionally one or both parties may pay a
floating rate of interest. Unlike an interest rate swap, however, the
principal amounts are exchanged at the beginning of the contract and returned
at the end of the contract. Changes in foreign exchange rates and changes in
interest rates, as described above may negatively affect currency swaps.
Caps, Collars and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
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Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the portfolio than if it had not entered into
any derivatives transactions. Derivatives may magnify the portfolio's gains or
losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities the portfolio is hedging may not move
in the same amount, or even in the same direction as the hedging instrument.
The adviser will try to minimize this risk by investing only in those
contracts whose behavior it expects to resemble the portfolio securities it is
trying to hedge. However, if the portfolio's prediction of interest and
currency rates, market value, volatility or other economic factors is
incorrect, the portfolio may lose money, or may not make as much money as it
expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
. current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract;
. a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops; and
. differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on
a broad market index. Since narrower indices are made up of a smaller number
of securities, they are more susceptible to rapid and extreme price
fluctuations because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of
the investments of the portfolio. A currency hedge, for example, should
protect a yen-denominated security from a decline in the yen, but will not
protect the portfolio against a price decline resulting from deterioration in
the issuer's creditworthiness. Because the value of the portfolio's foreign-
denominated investments changes in response to many factors other than
exchange rates, it may not be possible to match the amount of currency options
and futures to the value of the portfolio's investments precisely over
time.
Lack of Liquidity
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Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange
the contract was initially traded. Although a portfolio intends to purchase
options and futures only where there appears to be an active market, there is
no guarantee that such a liquid market will exist. If there is no secondary
market for the contract, or the market is illiquid, the portfolio may not be
able to close out its position. In an illiquid market, the portfolio may:
. have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
. have to purchase or sell the instrument underlying the contract;
. not be able to hedge its investments; and
. not be able realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
. an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
. unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
. the facilities of the exchange may not be adequate to handle current
trading volume;
. equipment failures, government intervention, insolvency of a brokerage firm
or clearing house or other occurrences may disrupt normal trading activity;
or
. investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including:
. actual and anticipated changes in interest rates;
. fiscal and monetary policies; and
. national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, a portfolio may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative prices have
occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
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Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally, the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life, usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued
together with a debt security or preferred stock and that give the holder the
right to buy proportionate amount of common stock at a specified price.
Warrants are freely transferable and are traded on major exchanges. Unlike
rights, warrants normally have a life that is measured in years and entitles
the holder to buy common stock of a company at a price that is usually higher
than the market price at the time the warrant is issued. Corporations often
issue warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before
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their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services;
. Factors affecting an entire industry, such as increases in production
costs; and
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
Investors in small and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of
their small or medium size, limited markets and financial resources, narrow
product lines and frequent lack of management depth. The securities of small
and medium companies are often traded in the over-the-counter market and might
not be traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency;
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. They can invest in American Depositary Receipts, European Depositary
Receipts and other similar global instruments; and
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities. EDRs are similar to ADRs, except that they are
typically issued by European Banks or trust companies.
Emerging Markets
An "emerging country" is generally a country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. Investments in these investment funds are subject to the
provisions of the 1940 Act. Shareholders of a UAM Fund that invests in such
investment funds will bear not only their proportionate share of the expenses
of the UAM Fund (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in foreign
securities:
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt;
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. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends;
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions;
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes; and
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit the portfolio's ability to invest in a particular country or
make it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to United States
companies. The lack of comparable information makes investment decisions
concerning foreign countries more difficult and less reliable than domestic
companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States;
. They have substantially less volume;
. Their securities tend to be less liquid and to experience rapid and erratic
price movements;
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates;
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets; and
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Funds denominate their net asset value in United States dollars,
the securities of foreign companies are frequently denominated in foreign
currencies. Thus, a change in the value of a foreign currency against the
United States dollar will result in a corresponding change in value of
securities denominated in that currency. Some of the factors that may impair
the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa;
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. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates;
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces;
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis;
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable; and
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the portfolio to recover
a portion of these taxes, the portion that cannot be recovered will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments;
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
. Offer less protection of property rights than more developed countries; and
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or
about
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that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that adopt the Euro
in all aspects of the investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custody and accounting. Some of the
uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
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A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by a portfolio. Like other shareholders, each portfolio
would pay its proportionate share of those fees. Consequently, shareholders of
a portfolio would pay not only the management fees of the portfolio, but also
the management fees of the investment company in which the portfolio invests.
A portfolio may invest up to 10% of its total assets in the securities of
other investment companies, but may not invest more than 5% of its total
assets in the securities of any one investment company or acquire more than 3%
of the outstanding securities of any one investment company.
The SEC has granted an order that allows a portfolio to invest the greater of
5% of its total assets or $2.5 million in the UAM DSI Money Market Portfolio,
provided that the investment is:
. For cash management purposes;
. Consistent with a portfolio's investment policies and restrictions; and
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When a portfolio enters into a repurchase agreement it will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form; and
. Require the counter party to add to the collateral whenever the price of
the repurchase agreement rises above the value of the underlying security
(i.e., it will require the borrower to "mark to the market" on a daily
basis).
22
<PAGE>
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, a portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before a portfolio can sell it and a portfolio might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
- --------------------------------------------------------------------------------
The portfolios may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Board, the Adviser determines the liquidity of such
investments by considering all relevant factors. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of these
securities could be more or less than those originally paid by a portfolio or
less than what may be considered the fair value of such securities.
SECURITIES LENDING
- --------------------------------------------------------------------------------
A portfolio may lend a portion of its total assets to broker- dealers or other
financial institutions. It may then reinvest the collateral it receives in
short-term securities and money market funds. When a portfolio lends its
securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned;
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U. S.
government;
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis);
. It must be able to terminate the loan at any time;
. It must receive reasonable interest on the loan (which may include the
portfolio investing any cash collateral in interest bearing short-term
investments); and
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
portfolio could:
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower; and
. Experience delays in recovering its securities.
WHEN ISSUED TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, a
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future. In
each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or deliver securities
until a later date. Typically, no income accrues on securities a portfolio has
committed to purchase before the securities are delivered, although the
portfolio may earn income on securities it has in a segregated account. A
portfolio will only enter into these types of transactions with the intention
of actually acquiring the securities, but may sell them before the settlement
date.
23
<PAGE>
A portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When a portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, a
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because a portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
A portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. A portfolio will segregate additional liquid assets daily so that
the value of such assets is equal to the amount of its commitments.
Investment Policies of the Portfolios
A portfolio will determine investment limitation percentages (with the
exception of a limitation relating to borrowing) immediately after and as a
result of its acquisition of such security or other asset. Accordingly, a
portfolio will not consider changes in values, net assets or other
circumstances when determining whether the investment complies with its
investment limitations.
FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following investment limitations are fundamental, which means a portfolio
cannot change them without approval by the vote of a majority of the
outstanding voting securities of the portfolio, as defined by the 1940 Act.
Balanced Portfolio
The portfolio will not:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities ).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 33 1/3% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
. Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1) making any
permitted borrowings, mortgages or pledges, or (2) entering into repurchase
transactions.
. Make loans except (1) by purchasing bonds, debentures or similar
obligations which are publicly distributed, including repurchase
agreements; provided however, that repurchase agreements maturing in more
than seven days, together with securities which are not readily marketable,
will not exceed 15% of the portfolio's total assets, or (2)
24
<PAGE>
by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the
1940 Act and the rules and regulations or interpretations of the SEC.
. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 33 1/3% of its assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total gross
assets.
Equity and Fixed Income Portfolios
Each of the portfolios will not:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities ).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Borrow, except (1) from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
. Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1) making any
permitted borrowings, mortgages or pledges, or (2) entering into repurchase
transactions.
. Make loans except (1) by purchasing bonds, debentures or similar
obligations which are publicly distributed, including repurchase
agreements; provided however, that repurchase agreements maturing in more
than seven days, together with securities which are not readily marketable,
will not exceed 10% of the portfolio's total assets, or (2) by lending its
portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act,
and the Rules and Regulations or interpretations of the SEC.
. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total gross
assets.
International Portfolio
The portfolio will not:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities ).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Borrow, except (1) from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies when the portfolio
adopts a temporary defensive position.
25
<PAGE>
. Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a portfolio from (1) making any
permitted borrowings, mortgages or pledges, or (2) entering into options
and futures or repurchase transactions.
. Make loans except (1) by purchasing bonds, debentures or similar
obligations which are publicly distributed, including repurchase
agreements; provided however, that repurchase agreements maturing in more
than seven days, together with securities which are not readily marketable,
will not exceed 10% of the portfolio's total assets, or (2) by lending its
portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act
and the Rules and Regulations or interpretations of the SEC.
. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its assets at fair market value.
. Purchase additional securities when borrowings exceed 5% of total gross
assets.
NON-FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following limitations are non-fundamental, which means a portfolio may
change them without shareholder approval.
Balanced Portfolio
The portfolio will not:
. Invest in commodities.
. Purchase on margin or sell short except as specified above.
. Underwrite the securities of other issuers or invest more than an aggregate
of 15% of the net assets of the portfolio, determined at the time of
investment, in securities subject to legal or contractual restrictions on
resale or securities for which there are no readily available markets,
including repurchase agreements having maturities of more than seven days.
Equity Portfolio
The portfolio will not:
. Invest more than 20% of the portfolio's assets in American Depositary
Receipts.
. Invest in commodities.
. Purchase on margin or sell short except as specified above.
. Underwrite the securities of other issuers or invest more than an aggregate
of 10% of the net assets of the portfolio, determined at the time of
investment, in securities subject to legal or contractual restrictions on
resale or securities for which there are no readily available markets,
including repurchase agreements having maturities of more than seven days.
Fixed Income Portfolio
The portfolio will not:
. Invest in commodities.
. Invest more than 20% of the portfolio's assets in obligations or foreign
governments, agencies, or corporations denominated either in U.S. dollars
or foreign currencies.
. Purchase on margin or sell short except as specified above.
26
<PAGE>
. Underwrite the securities of other issuers or invest more than an aggregate
of 10% of the net assets of the portfolio, determined at the time of
investment, in securities subject to legal or contractual restrictions on
resale or securities for which there are no readily available markets,
including repurchase agreements having maturities of more than seven days.
In addition, the adviser intends to limit the TS&W Fixed Income Portfolio's
investments to investment grade securities; however, the adviser reserves the
right to retain securities which are rated Ba or B by Moody's or BB or B by
S&P if, in the adviser's judgement, maintaining a position in the securities
is warranted.
International Portfolio
The portfolio will not:
. Invest in commodities except that the portfolio may invest in futures
contracts and options to the extent that not more than 5% of the
portfolio's assets is required as deposit to secure obligations under
futures contracts and the entry into forward foreign currency exchange
contracts is not and shall not be deemed to involve investing in
commodities.
. Invest in stock or bond futures and/or options on futures unless not more
than 5% of the portfolio's assets are invested in stock or bond futures and
options on futures.
. Purchase on margin or sell short except as specified above.
. Underwrite the securities of other issuers or invest more than an aggregate
of 10% of the net assets of the portfolio, determined at the time of
investment, in securities subject to legal or contractual restrictions on
resale or securities for which there are no readily available markets,
including repurchase agreements having maturities of more than seven days.
Management Of The Fund
The governing board manages the business of the Fund. The governing board
elects officers to manage the day-to-day operations of the Fund and to execute
policies the board has formulated. The Fund pays each board member who is not
also an officer or affiliated person (independent board member) a $150
quarterly retainer fee per active portfolio and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and
other expenses incurred while attending board meetings. The $2,000 meeting fee
and expense reimbursements are aggregated for all of the board members and
allocated proportionately among the portfolios of the UAM Funds Complex. The
Fund does not pay board members that are affiliated with the fund for their
services as board members. UAM, its affiliates or SEI pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Fund and total compensation received from the
UAM Funds Complex. The UAM Funds Complex is currently comprised of 51
portfolios. Those people with an asterisk (*) beside their name are
"interested persons" of the Fund as that term is defined in the 1940 Act. Mr.
English does have an investment advisory relationship with Investment
Counselors of Maryland, an investment adviser to one of the portfolios in the
UAM Funds Complex. However, the Fund does not believe that the relationship is
a material business relationship, and, therefore, does not consider him to be
an "interested person" of the Fund. If these circumstances change, the Board
will determine whether any action is required to change the composition of the
Board.
27
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From the Fund
From the Fund Complex as of
Position with as of October October 31,
Name, Address, DOB Fund Principal Occupations During the Past 5 years 31, 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board Member President of Squam Investment Management Company, $7,137 $10,625
College Road -- RFD 3 Inc. and Great Island Investment Company, Inc.;
Meredith, NH 03253 President of Bennett Management Company from 1988 to
1/26/29 1993.
- -----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Member Financial Officer of World Wildlife Fund since $7,137 $10,625
1250 24th St., NW January 1999; Vice President for Finance and
Washington, DC 20037 Administration and Treasurer of Radcliffe College
8/14/51 from 1991 to 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Member Executive Vice President and Chief Administrative $7,137 $10,625
100 King Street West Officer of Philip Services Corp.; Formerly, a Partner
P.O. Box 2440, LCD-1 in the Philadelphia office of the law firm Dechert
Hamilton Ontario, Price & Rhoads and a Director of Hofler Corp.
Canada L8N-4J6
4/21/42
- -----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board Member President and Chief Executive Officer of Broventure $7,137 $10,625
16 West Madison Street Company, Inc.; Chairman of the Board of Chektec
Baltimore, MD 21201 Corporation and Cyber Scientific, Inc.
8/5/48
- -----------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board Member President of UAM Investment Services, Inc. since 0 0
211 Congress Street March 1999; Vice President UAM Trust Company since
Boston, MA 02110 January 1996; Principal of UAM Fund Distributors,
2/24/53 Inc. since December 1995; Vice President of UAM
Investment Services, Inc. from January 1996 to March
1999 and a Director and Chief Operating Officer of CS
First Boston Investment Management from 1993-1995.
- -----------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Member; Chairman, Chief Executive Officer and a Director of 0 0
One International Place President and United Asset Management Corporation; Director,
Boston, MA 02110 Chairman Partner or Trustee of each of the Investment
3/21/35 Companies of the Eaton Vance Group
of Mutual Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board Member President and Chief Investment Officer of Dewey 0 0
One Financial Center Square Investors Corporation since 1988; Director and
Boston, MA 02111 Chief Executive Officer of H.T. Investors, Inc.,
7/1/43 formerly a subsidiary of Dewey Square.
- -----------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial Officer 0 0
One International Place President of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- -----------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of the 0 0
211 Congress Street Fidelity Group of Mutual Funds from 1991 to 1995;
Boston, MA 02110 held various other offices with Fidelity Investments
7/4/51 from November 1990 to March 1995.
- -----------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of Chase Global Fund
Boston, MA 02110 Services Company from 1995 to 1996; Senior Manager of
9/18/63 Deloitte & Touche LLP from 1985 to 1995,
- -----------------------------------------------------------------------------------------------------------------------------------
Robert J. DellaCroce Assistant Director, Mutual Fund Operations - SEI Investments; 0 0
SEI Investments Treasurer Senior Manager at Arthur Andersen prior to 1994.
One Freedom Valley Rd.
Oaks, PA 19456
12/17/63
</TABLE>
28
<PAGE>
Principal Shareholders
As of February 1, 2000, the following persons or organizations held of
record or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned Portfolio Class
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York Life Trust Company 9.34% TS&W Equity Institutional Class
51 Madison Ave, RM 117A Portfolio Shares
New York, NY 10010-1603
-------------------------------------------------------------------------------------------------------------------------------
Lewis Gale Clinic, Inc. 8.71% TS&W Equity Institutional Class
c/o Gil Coblintz Portfolio Shares
1802 Braeburn Drive
Salem, VA 24153-7306
-------------------------------------------------------------------------------------------------------------------------------
Crestar Bank 10.65% TS&W Fixed Income Institutional Class
FBO C B Fleet DEF Benefit PP TRSTE Portfolio Shares
Attn: Jan Rittenhouse
P.O. Box 105870
Center 3144
Atlanta, GA 30348-5870
-------------------------------------------------------------------------------------------------------------------------------
Lewis Gale Clinic, Inc. 7.26% TS&W Fixed Income Institutional Class
c/o Gil Coblentz Portfolio Shares
1802 Braeburn Drive
Salem, VA 24153-7399
-------------------------------------------------------------------------------------------------------------------------------
F & M Company 6.07% TS&W Fixed Income Institutional Class
Reinvest Account Portfolio Shares
PO Box 2800
Winchester, VA 22604-2000
-------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & C., Inc. 5.38% TS&W Fixed Income Institutional Class
Reinvest Account Portfolio Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, Ca 94104-4122
-------------------------------------------------------------------------------------------------------------------------------
Riverside Health Care Foundation 13.04% TS&W International Institutional Class
606 Denbigh Blvd., Suite 601 Equity Portfolio Shares
Newport News, VA 23608-4442
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio. As of
February 1, 2000, the directors and officers of the Fund owned less than 1%
of the outstanding shares of the portfolios.
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Thompson, Siegel & Walmsley, Inc., a Virginia corporation located at 5000
Monument Avenue, Richmond, Virginia 23230, is the investment adviser to
each of the portfolios. The adviser manages and supervises the investment
of each portfolio's assets on a discretionary basis. The adviser, an
affiliate of United Asset Management Corporation, has provided investment
management services to corporations, pension and profit-sharing plans,
401(k) and thrift plans, trusts, estates and other institutions and
individuals since 1970
29
<PAGE>
The adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds Complex.
Portfolio Management
Balanced, Equity and Fixed Income Portfolios
Investment committees are primarily responsible for the day-today-
management of the Balanced, Equity and Fixed Income Portfolios. Listed
below are the investment professionals of the adviser that comprise those
committees and a description of their business experience during the past
five years.
Name & Title Experience
---------------------------------------------------------------------------
John T Siegel, CFA Princeton University, B.A., 1961;
Managing Director United States Navy, Officer, 1961-1965;
University of Virginia Graduate School
of Business Administration, M.B.A.,
1967; Chartered Financial Analyst;
Chartered Investment Counsel; Co-founder
of Thompson, Siegel & Walmsley, Inc. in
1969.
---------------------------------------------------------------------------
Matthew G. Thompson, CFA Washington & Lee University, B.S.
Managing Director Commerce, 1964; University of Virginia
Graduate School of Business
Administration, M.B.A., 1966; Chartered
Financial Analyst; Chartered Investment
Counsel: Co-founder of Thompson, Siegel,
& Walmsley, Inc. in 1969.
---------------------------------------------------------------------------
Horace P. Whitworth, II, University of Virginia, B.S. Commerce,
CFA, CPA 1978; Chartered Financial Analyst;
Senior Vice President Chartered Investment Counsel; Thompson,
Siegel & Walmsley, Inc., 1986-Present.
---------------------------------------------------------------------------
Paul A. Ferwerda, CFA Auburn University, B.S. finance, 1979;
Senior Vice President Duke University, Fuqua School of
Business, M.B.A., 1982; Chartered
Financial Analyst; Chartered Investment
Counsel; Thompson, Siegel & Walmsley,
Inc., 1987-Present.
---------------------------------------------------------------------------
Charles A. Gomer, III University of North Carolina, Chapel
Vice President Hill, A.B., 1971; University of
Richmond, M.S., 1978; Thompson, Siegel &
Walmsley, Inc., 1991-Present.
---------------------------------------------------------------------------
G.D. Rothenberg, CFA University of Virginia, B.A., 1975;
Vice President UCLA Graduate School of Management,
M.B.A., 1979; Chartered Financial
Analyst; Chartered Investment Counsel;
Thompson, Siegel, & Walmsley, Inc.,
1992-Present.
Before joining the adviser in 1992, Mr.
Rothenberg was involved in international
investment management at Scudder,
Stevens & Clark, Inc.
---------------------------------------------------------------------------
Elizabeth Cabell Jennings, CFA The College of William and Mary, B.A.
Vice President Economics, 1985; Chartered Financial
Analyst; Chartered Investment Counsel;
Thompson, Siegel & Walmsley, Inc.,
1986-Present.
---------------------------------------------------------------------------
Alan C. Ashworth,CFA The College of William and Mary, B.B.A
Vice President Management, 1985; Chartered Financial
Analyst; Thompson, Siegel & Walmsley,
Inc., 1987-Present.
---------------------------------------------------------------------------
Stuart R.Davies, CFA Birmingham Southern College, B.S.
Vice President Chemistry/Economics, 1985; Virginia
Commonwealth University, M.S. Finance,
1994; Chartered Financial Analyst;
Chartered Investment Counsel; Thompson,
Siegel, Walmsley, Inc. 1992-Present.
---------------------------------------------------------------------------
J. Shelton Horsley, IV, CFA University of Virginia, B.A., 1985;
University of Virginia,
30
<PAGE>
Name & Title Experience
---------------------------------------------------------------------------
Vice President M.B.A., 1991; Thompson, Siegel &
Walmsley, Inc., 1994-Present.
---------------------------------------------------------------------------
Brandon H. Harrell, CFA Wake Forest University, B.A. Economics,
Vice President 1982; George Mason University, M.B.A.,
1990; Chartered Financial Analyst;
Thompson, Siegel & Walmsley, Inc.,
1996-Present.
---------------------------------------------------------------------------
Gordon Goodykoontz, CFA Virginia Polytechnic Institute, BA
Senior Vice President Business, 1962; University of Virginia,
MBA, 1966; Chartered Financial Analyst;
Thompson, Siegel & Walmsley, Inc.,
1997-Present.
International Equity Portfolio
G.D. Rothenberg is primarily responsible for the day-to-day management of
the International Equity Portfolio and has been since its inception in
December of 1992. Supporting Mr. Rothenberg with financial investment
research are Brandon H. Harrell and Stuart R. Davies. The biographical
information of Messrs. Rothenberg and Davies is set forth above.
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Fund has filed each agreement with the SEC as part
of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of a portfolio's assets;
. Continuously reviews, supervises and administers the investment program
of a portfolio; and
. Determines what portion of a portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Investment Advisory Agreement, (2) reckless disregard by the adviser of
its obligations and duties under the Investment Advisory Agreement, or (3) a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Investment Advisory Agreement.
Continuing an Investment Advisory Agreement
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Board Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party; and
. (2) (a) majority of the Board Members or (b) a majority of the shareholders
of the portfolio.
31
<PAGE>
Terminating an Investment Advisory Agreement
The Fund may terminate an Investment Advisory Agreement at any time, without
the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so or a majority of
Board Members vote to do so; and
. It gives the adviser 60 days' written notice.
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, each portfolio pays its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of the
portfolio. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that a portfolio pays in any given year may
be different from the rate set forth in its contract with the adviser. For
the last three fiscal years, the portfolios paid the following in management
fees to the adviser:
Investment Advisory Fees Paid
- ------------------------------------------------------------------------------
Equity Portfolio $ 682,600
1999
- ------------------------------------------------------------------------------
1998 $ 740,063
- ------------------------------------------------------------------------------
1997 $ 684,525
- ------------------------------------------------------------------------------
International Equity Portfolio $1,145,893
1999
- ------------------------------------------------------------------------------
1998 $1,187,016
- ------------------------------------------------------------------------------
1997 $1,164,469
- ------------------------------------------------------------------------------
Fixed Income Portfolio $ 312,298
1999
- ------------------------------------------------------------------------------
1998 $ 323,555
- ------------------------------------------------------------------------------
1997 $ 286,323
- ------------------------------------------------------------------------------
Balanced Portfolio N/A
1999
- ------------------------------------------------------------------------------
1998 N/A
- ------------------------------------------------------------------------------
1997 N/A
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously.
While UAMFDI will use its best efforts to sell shares of the Fund, it is not
obligated to sell any particular amount of shares. UAMFDI receives no
compensation for its services. UAMFDI, an affiliate of UAM, is located at 211
Congress Street, Boston, Massachusetts 02110.
SHAREHOLDER SERVICING ARRANGEMENTS
- --------------------------------------------------------------------------------
UAM and each of its affiliates, may, at its own expense, compensate a Service
Agent or other person for marketing, shareholder servicing, record-keeping
and/or other services performed with respect to the Fund or the portfolio. The
person making such payments may do so out of its revenues, its profits or any
other source available to it. Such services arrangements, when in effect, are
made generally available to all qualified service providers. The adviser may
also compensate its affiliated companies for referring investors to the
portfolio.
32
<PAGE>
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend disbursing
and transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and Board Members who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if the
Board specifically approves such continuance every year. The Board or UAMFSI
may terminate the Fund Administration Agreement, without penalty, on not less
than ninety (90) days' written notice. The Fund Administration Agreement
automatically terminates upon its assignment by UAMFSI without the prior
written consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing
its duties under the Fund Administration Agreement. Such people may be
officers and employees who are employed by both UAMFSI and the Fund. UAMFSI
will pay such people for such employment. The Fund will not incur any
obligations with respect to such people.
33
<PAGE>
Administration and Transfer Agency Services Fees
Each portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, a portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of each portfolio at
the following rates:
Annual Rate
------------------------------------------------------------------
Equity Portfolio 0.063%
------------------------------------------------------------------
International Equity Portfolio 0.063%
------------------------------------------------------------------
Fixed Income Portfolio 0.043%
------------------------------------------------------------------
Balanced Portfolio 0.063%
2. Each portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is calculated
at the annual rate of:
. Not more than $35,000 for the first operational class; plus
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the UAM Funds
Complex.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services
as transfer agent and dividend-disbursing agent equal to $10,500 for the
first operational class and $10,500 for each additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational
class and $2,500 for each additional class.
For the last three fiscal years the portfolios paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio $66,475 $ 87,270 $153,745
1999
- ----------------------------------------------------------------------------------------------------------
1998 $62,586 $ 97,605 $160,191
- ----------------------------------------------------------------------------------------------------------
1997 $54,738 $ 91,762 $146,500
- ----------------------------------------------------------------------------------------------------------
International Equity Portfolio $81,536 $ 99,204 $180,740
1999
- ----------------------------------------------------------------------------------------------------------
1998 $75,355 $113,008 $188,363
- ----------------------------------------------------------------------------------------------------------
1997 $69,862 $120,691 $190,553
- ----------------------------------------------------------------------------------------------------------
Fixed Income Portfolio $37,612 $ 79,215 $116,827
1999
- ----------------------------------------------------------------------------------------------------------
1998 $31,772 $ 82,844 $114,616
- ----------------------------------------------------------------------------------------------------------
1997 $25,439 $ 79,951 $105,390
- ----------------------------------------------------------------------------------------------------------
Balanced Portfolio N/A N/A N/A
1999
- ----------------------------------------------------------------------------------------------------------
1998 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A
</TABLE>
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
34
<PAGE>
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
Brokerage Allocation and Other Practices
SELECTION OF BROKERS
Each Investment Advisory Agreement authorizes the adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each portfolio. The Investment Agreement also directs the
adviser to use its best efforts to obtain the best execution with respect to
all transactions for the portfolio. The adviser may select brokers based on
research, statistical and pricing services they provide to the adviser.
Information and research provided by a broker will be in addition to, and not
instead of, the services the adviser is required to perform under the
Investment Advisory Agreement. In so doing, the portfolio may pay higher
commission rates than the lowest rate available when the adviser believes it
is reasonable to do so in light of the value of the research, statistical, and
pricing services provided by the broker effecting the transaction.
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for
their clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for each portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
adviser to engage in a simultaneous transaction, that is, buy or sell the same
security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolios, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage
transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from
dealers serving as market makers will include a dealer's mark-up or reflect a
dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a portfolio will
not pay brokerage commissions for such purchases. When a debt security is
bought from an underwriter, the purchase price will usually include an
underwriting commission or concession. The purchase price for securities
bought from dealers serving as market makers will similarly include the
dealer's mark up or reflect a dealer's mark down. When a portfolio executes
transactions in the over-the-counter market, it will deal with primary market
makers unless prices that are more favorable are otherwise obtainable.
35
<PAGE>
Commissions Paid
For the last three fiscal years, the portfolios paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
- ---------------------------------------------------------------------------
<S> <C>
Equity Portfolio
1999 $106,846
- ---------------------------------------------------------------------------
1998 $147,944
- ---------------------------------------------------------------------------
1997 $ 96,579
- ---------------------------------------------------------------------------
International Equity Portfolio
1999 $203,738
- ---------------------------------------------------------------------------
1998 $221,995
- ---------------------------------------------------------------------------
1997 $359,324
- ---------------------------------------------------------------------------
Fixed Income Portfolio
1999 $ 0
- ---------------------------------------------------------------------------
1998 $ 0
- ---------------------------------------------------------------------------
1997 $ 0
- ---------------------------------------------------------------------------
Balanced Portfolio
1999 N/A
- ---------------------------------------------------------------------------
1998 N/A
- ---------------------------------------------------------------------------
1997 N/A
</TABLE>
Capital Stock and Other Securities
The Fund
The Fund was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Fund changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Fund changed its name
to "UAM Funds, Inc." The Fund's principal executive office is located at 211
Congress Street, Boston, MA 02110; however, shareholders should direct all
correspondence to the address listed on the cover of this SAI. The Fund is an
open-end management company.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Articles of Incorporation, as amended, permit its governing board
to issue three billion shares of common stock, with a $.001 par value. The
governing board has the power to create and designate one or more series
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder approval.
When issued and paid for, the shares of each series and class of the Fund are
fully paid and nonassessable, and have no pre-emptive rights or preference as
to conversion, exchange, dividends, retirement or other features.
The shares of each series and class have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of members of the governing board can elect all of the members if they choose
to do so. On each matter submitted to a vote of the shareholders, a
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books
of the Fund. Shares of all classes will vote together as a single class except
when otherwise required by law or as determined by the members of the Fund's
governing board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will
36
<PAGE>
distribute is net assets to its shareholders in proportion to the number of
shares of that portfolio or class thereof held by them and recorded on the
books of the Fund. The liquidation of any portfolio or class thereof may be
authorized at any time by vote of a majority of the members of the governing
board.
The governing board has authorized three classes of shares, Institutional,
Institutional Service and Adviser. The three classes represent interests in
the same assets of a portfolio and, except as discussed below, are identical
in all respects. Unlike Institutional and Adviser Class Shares, Institutional
Service Class Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Adviser
Class Shares impose a sales load on purchases. The classes also have
different exchange privileges. The net income attributable to Institutional
Service Class Shares and the dividends payable on Institutional Service Class
Shares will be reduced by the amount of the shareholder servicing and
distribution fees; accordingly, the net asset value of the Institutional
Service Class Shares will be reduced by such amount to the extent a portfolio
has undistributed net income.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
. Income dividends and capital gains distributions are reinvested in
additional shares at net asset value;
. Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV; and
. Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
Each portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year so that the portfolio itself generally will be relieved
of federal income and excise taxes. If a portfolio were to fail to so
qualify: (1) it would be taxed at regular corporate rates without any
deduction for distributions to shareholder; and (2) its shareholders would be
taxed as if they received ordinary dividends, although corporate shareholders
could be eligible for the dividends received deduction.
A portfolios' dividends that are paid to their corporate shareholders and are
attributable to qualifying dividends it received from U.S. domestic
corporations may be eligible, in the hands of such shareholders, for the
corporate dividends received deduction, subject to certain holding period
requirements and debt financing limitations.
37
<PAGE>
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to the
NAV of the portfolio. The Fund calculates the NAV of a portfolio by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. For purposes of this calculation:
. Liabilities include accrued expenses and dividends payable; and
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued neither exceeding the asked prices nor less than
the bid prices. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The converted value is based upon the
bid price of the foreign currency against U.S. dollars quoted by any major
bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
38
<PAGE>
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the Fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the Fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "How the Fund Values it Assets" at the next
determination of net asset value after acceptance. The Fund will issue shares
of the portfolio at the NAV of the portfolio determined as of the same time.
The Fund will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Fund will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the portfolio;
. The securities have readily available market quotations;
. The investor represents and agrees that the securities are liquid and that
there are no restrictions on their resale imposed by the 1933 Act or
otherwise;
. All dividends, interest, subscription, or other rights pertaining to such
securities become the property of the portfolio and are delivered to the
fund by the investor upon receipt from the issuer; and
. Immediately after the transaction is complete, the value of all securities
of the same issuer held by the portfolio cannot exceed 5% of the net assets
of the portfolio. This condition does not apply to U.S. government
securities.
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for federal income tax purposes depending upon the cost of securities
or local currency exchanged. Investors interested in such exchanges should
contact the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the
portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued;
. A letter of instruction or an assignment specifying the number of shares or
dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered;
. Any required signature guarantees (see "Signature Guarantees"); and
. Any other necessary legal documents for estates, trusts, guardianships,
custodianships, corporations, pension and profit sharing plans and other
organizations.
39
<PAGE>
By Telephone
Shareholders may not do the following by telephone:
. Change the name of the commercial bank or the account designated to receive
redemption proceeds. To change an account in this manner, you must submit a
written request signed by each shareholder, with each signature guaranteed.
. Redeem shares represented by a certificate.
The Fund and UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable for
any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors
may be required to provide additional telecopied written instructions of such
transaction requests. The Fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the UAMSSC
does not employ the procedures described above. Neither the Fund nor the
UAMSSC will be responsible for any loss, liability, cost or expense for
following instructions received by telephone that it reasonably believes to be
genuine.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable rules of the SEC. Investors may incur
brokerage charges on the sale of portfolio securities received in payment of
redemptions.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part, in investment securities or in cash, as the Board may deem
advisable; however, payment will be made wholly in cash unless the governing
board believes that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth
under "Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The Fund requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed; and
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The Fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
40
<PAGE>
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Credit unions must be authorized to issue signature guarantees.
Other Redemption Information
Normally, the Fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Fund will pay
your redemption proceeds earlier as applicable law so requires.
When the Fund may suspend redemption privileges or postpone the date of
payment:
. when the NYSE and custodian bank are closed;
. when trading on the NYSE is restricted;
. during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the Commission may permit.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any time.
Such instructions may include limiting the amount or frequency of exchanges
and may be for the purpose of assuring such exchanges do not disadvantage the
Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
Performance Calculations
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. The performance is calculated separately for
each portfolio.
41
<PAGE>
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in a portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a stated
period. An average annual total return is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
The fund calculates the average annual total return of a portfolio by finding
the average annual compounded rates of return over one, five and ten-year
periods that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each one, five and ten-year period and the
deduction of all applicable Fund expenses on an annual basis. Since
Institutional Service Class Shares bear additional service and distribution
expenses, their average annual total return will generally be lower than that
of the Institutional Class Shares.
The fund calculates these figures according to the following formula:
P (1 + T)/n/ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of
the 1, 5 or 10 year periods (or fractional portion thereof).
Set forth in the table below are the portfolios' average annual returns for
the one-year period and the five-year period ended October 31, 1999 and the
shorter of the ten-year period ended October 30, 1999 or the period from a
portfolio's inception date through October 31, 1999.
<TABLE>
<CAPTION>
Shorter of
10 Years or 30-Day
One Year Five Years Since Inception Yield Inception Date
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 14.64% 17.04% 13.83% N/A 7/17/92
- --------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio 33.78% 9.77% 12.27% N/A 12/18/92
- --------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 1.71% 6.98% 5.66% 5.69% 7/17/92
</TABLE>
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in a portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all mutual funds. As
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
The current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
base period. Since Institutional Service Class shares bear additional service
and distribution expenses, their yield will generally be lower than that of
the Institutional Class Shares.
42
<PAGE>
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period.
COMPARISONS
- --------------------------------------------------------------------------------
A portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported
in financial and industry publications, and various indices as further
described in this SAI. This information may also be included in sales
literature and advertising.
To help investors better evaluate how an investment in a portfolio might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated
above) to performance as reported by other investments, indices and averages.
Please see "Comparative Benchmarks" for publications, indices and averages
that may be used.
In assessing such comparisons of performance, an investor should keep in mind:
. that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in a
portfolio;
. that the indices and averages are generally unmanaged; and
. that the items included in the calculations of such averages may not be
identical to the formula used by a portfolio to calculate its performance;
and
. that shareholders cannot invest directly in such indices or averages.
In addition, there can be no assurance that a portfolio will continue this
performance as compared to such other averages.
Financial Statements
The following documents are included in the portfolios' October 31, 1999
Annual Report:
. Financial statements for the fiscal year ended October 31, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
43
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Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
Glossary
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser to each portfolio.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
Fund refers to UAM Funds, Inc.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board," the NYSE is located on Wall Street and is the largest exchange in the
United States.
Portfolio refers to a single series of the Fund, while portfolios refer to all
of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal agency
that administers most of the federal securities laws in the United States. In
particular, the SEC administers the 1933 Act, the 1940 Act and the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-shareholder-
servicing agent
Bond Ratings
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Preferred Stock Ratings
aaa An issue which is rated "aaa" is considered to be a top-
quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within
the universe of preferred stocks.
44
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aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance the earnings and asset protection will
remain relatively well-maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-
medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classification,
earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa An issue that which is rated "baa" is considered to be a
medium--grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great
length of time.
ba An issue which is rated "ba" is considered to have
speculative elements and its future cannot be considered
well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in
this class.
b An issue which is rated "b" generally lacks the
characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport
to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payments.
c This is the lowest rated class of preferred or preference
stock. Issues so rated can thus be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
plus (+) or Moody's applies numerical modifiers 1, 2, and 3 in each
minus (-) rating classification: the modifier 1 indicates that the
security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking and
the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
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<PAGE>
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con. (...) (This rating applies only to U.S. Tax-Exempt Municipals)
Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin
when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category;
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
Short-Term Prime Rating System - Taxable Debt & Deposits Globally
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Prime-1 Issuers rated Prime-1 (or supporting institution) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics:
. Leading market positions in well-established industries.
. Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
. Well-established access to a range of financial markets
and assured sources of alternate liquidity.
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<PAGE>
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligation.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS SERVICES
- --------------------------------------------------------------------------------
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment-capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations
are typically rated lower than senior obligations, to reflect the lower
priority in bankruptcy, as noted above. Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
AAA An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
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<PAGE>
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposures to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated 'CCC' is currently vulnerable to non-payment, and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligations.
CC An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C A subordinated debt or preferred stock obligation rated 'C' is
CURENTLY HIGHLY VULNERABLE to non-payment. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed or
similar action taken, but payments on this obligation are being
continued. A 'C' will also be assigned to a preferred stock issue in
arrears on dividends or sinking fund payments, but that is currently
paying.
D An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating.
Examples include: obligation linked or indexed to equities,
currencies, or commodities; obligations exposed to severe prepayment
risk - such as interest-only or principal-only mortgage securities;
and obligations with unusually risky interest terms, such as inverse
floaters.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of
policy.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
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<PAGE>
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment
on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not expired,
unless Standard & Poors' believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risks considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key
factor in this analysis. An obligor's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign
currency issuer ratings are also distinguished from local currency issuer
ratings to identity those instances where sovereign risks make them different
for the same issuer.
DUFF & PHELPS CREDIT RATING CO.
- --------------------------------------------------------------------------------
Long-Term Debt and Preferred Stock
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+/AA/ High credit quality. Protection factors are strong. Risk is
AA- modest but may vary slightly from time to time because of economic
conditions.
A+/A/A- Protection factors are average but adequate. However, risk factors
are more variable in periods of greater economic stress.
BBB+/BBB Below-average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during
economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
BB- due. Present or prospective financial protection factors fluctuate
according to industry conditions. Overall quality may move up or
down frequently within this category.
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<PAGE>
B+/B/B- Below investment grade and possessing risk that obligation will not
be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
Short-Term Debt
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection factors qualify issues
as to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
Non-Investment Grade
D-4 Speculative investment characteristics. Liquidity is not sufficient
to insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal and/or interest payments.
FITCH IBCA RATINGS
- --------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
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<PAGE>
AA Very high credit quality. `AA' ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions
than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial
alternatives may be available to allow financial commitments to be
met. Securities rated in this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and
economic environment.
CCC,CC,C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates
that default of some kind appears probable. `C' ratings signal
imminent default.
DDD,DD,D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with
any precision, the following serve as general guidelines. "DDD"
obligations have the highest potential for recovery, around 90%-100%
of outstanding amounts and accrued interest. "D" indicates potential
recoveries in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations.
Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally
undergoing a formal reorganization or liquidation process; those
rated "DD" are likely to satisfy a higher portion of their
outstanding obligations, while entities rated "D" have a poor
prospect for repaying all obligations.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the Best capacity for timely
payment of financial commitments; may have an added "+" to denote
any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as
in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
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<PAGE>
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there
is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.
Comparative Benchmarks
(alphabetically)
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics -- a statistical measure of change, over time in the price
of goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange. It has been a widely followed indicator of the stock
market since October 1, 1928.
Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper, Inc., Morningstar, Inc., The New York
Times, Personal Investor, The Wall Street Journal and Weisenberger Investment
Companies Service -- publications that rate fund performance over specified
time periods.
Historical data supplied by the research departments of First Boston
Corporation, J.P. Morgan & Co, Inc., Salomon Smith Barney, Merrill Lynch &
Co., Inc., Lehman Brothers, Inc. and Bloomberg L.P.
52
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IBC's Money Fund Average/All Taxable Index - an average of all major money
market fund yields, published weekly for 7- and 30-day yields.
IFC Investable Composite Index - an unmanaged market capitalization-weighted
index maintained by the International Finance Corporation. This index
consists of over 890 companies in 26 emerging equity markets, and is designed
to measure more precisely the returns portfolio managers might receive from
investment in emerging markets equity securities by focusing on companies and
markets that are legally and practically accessible to foreign investors.
Lehman Brothers Indices:
------------------------
Lehman Brothers Aggregate Bond Index - an unmanaged fixed income market value-
weighted index that combines the Lehman Government/Corporate Index and the
Lehman Mortgage-Backed Securities Index, and includes treasury issues, agency
issues, corporate bond issues and mortgage backed securities. It includes
fixed rate issuers of investment grade (BBB) or higher, with maturities of at
least one year and outstanding par values of at least $100 million for U.S.
government issues and $25 million for others.
Lehman Brothers Corporate Bond Index - an unmanaged index of all publicly
issued, fixed-rate, nonconvertible investment grade domestic corporate debt.
Also included are yankee bonds, which are dollar-denominated SEC registered
public, noncovertible debt issued or guaranteed by foreign sovereign
governments, municipalities, or governmental agencies, or international
agencies.
Lehman Brothers Government Bond Index -an unmanaged treasury bond index
including all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues, and the Agency Bond Index (all publicly issued
debt of U.S. government agencies and quasi-federal corporations, and corporate
debt guaranteed by the U.S. government). In addition to the aggregate index,
sub-indices cover intermediate and long term issues.
Lehman Brothers Government/Corporate Bond Index -- an unmanaged fixed income
market value-weighted index that combines the Government and Corporate Bond
Indices, including U.S. government treasury securities, corporate and yankee
bonds. All issues are investment grade (BBB) or higher, with maturities of
at least one year and outstanding par value of at least $100 million of U.S.
government issues and $25 million for others. Any security downgraded during
the month is held in the index until month end and then removed. All returns
are market value weighted inclusive of accrued income.
Lehman Brothers High Yield Bond Index - an unmanaged index of fixed rate, non-
investment grade debt. All bonds included in the index are dollar
denominated, noncovertible, have at least one year remaining to maturity and
an outstanding par value of at least $100 million.
Lehman Brothers Intermediate Government/Corporate Index - an unmanaged fixed
income, market value-weighted index that combines the Lehman Brothers
Government Bond Index (intermediate-term sub-index) and four corporate bond
sectors.
Lehman Brothers Mortgage-Backed Securities Index - an unmanaged index of all
fixed-rate securities backed by mortgage pools of Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Associateion (FNMA).
Lipper, Inc./Lipper Indices/Lipper Averages
-------------------------------------------
The Lipper Indices are equally weighted indices for typically the 30 largest
mutual funds within their respective portfolio investment objectives. The
indices are currently grouped in six categories: U.S. Diversified Equity with
12 indices; Equity with 27 indices, Taxable Fixed-Income with 20 indices, Tax-
Exempt Fixed-Income with 28 indices, Closed-End Funds with 16 indices, and
Variable Annuity Funds with 18 indices.
In September, 1999, Lipper, Inc. introduced its new portfolio-based mutual
fund classification method in which peer comparisons are based upon
characteristics of the specific stocks in the underlying funds, rather than
upon a broader investment objective stated in a prospectus. Certain of
Lipper, Inc.'s classifications for general equity funds' investment objectives
were changed while other equity objectives remain unchanged. Changing
investment objectives include Capital Appreciation Funds, Growth Funds, Mid-
Cap Funds, Small-Cap Funds, Micro-Cap Funds, Growth & Income
53
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Funds, and Equity Income Funds. Unchanged investment objectives include Sector
Equity Funds, World Equity Funds, Mixed Equity Funds, and certain other funds
including all Fixed Income Funds and S&P(R) Index Funds.
Criteria for the Lipper Indices are: 1) component funds are largest in group;
2) number of component funds remains the same (30); 3) component funds are
defined annually; 4) can be linked historically; and 5) are used as a
benchmark for fund performance.
Criteria for the Lipper Averages are: 1) includes all funds in the group in
existence for the period; 2) number of component funds always changes; 3)
universes are dynamic due to revisions for new funds, mergers, liquidations,
etc.; and 4) will be inaccurate if historical averages are linked.
Certain Lipper, Inc. indices/averages used by the UAM Funds may include, but
are not limited to, the following:
Lipper Short-Intermediate Investment Grade Debt Funds Average -- is an average
of 100 funds that invest at least 65% of assets in investment grade debt
issues (BBB or higher) with dollar-weighted average maturities of one to five
years or less. (Taxable Fixed-Income category)
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%. (Equity category)
Lipper Equity Income Fund Index - an unmanaged index of equity funds which
seek relatively high current income and growth of income through investing 60%
or more of the portfolio in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase. (Equity
category)
Lipper Equity Small Cap Fund Index - an unmanaged index of funds by prospectus
or portfolio practice invest primarily in companies with market
capitalizations less than $1 billion at the time of purchase. (Equity
category)
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size which invest in companies with long-term earnings expected to
grow significantly faster than the earnings of the stocks represented in the
major unmanaged stock indices. (Equity category)
Lipper Mutual Fund Performance Analysis and Lipper -Fixed Income Fund
Performance Analysis -- measures total return and average current yield for
the mutual fund industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestments of all distributions, exclusive
of any applicable sales charges.
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index -- is an unmanaged
index composed of U.S. treasuries, agencies and corporates with maturities
from 1 to 4.99 years. Corporates are investment grade only (BBB or higher).
Merrill Lynch 1-3 Year Treasury Index - an unmanaged index composed of U.S.
treasury securities with maturities from 1 to 3 years.
Morgan Stanley Capital International EAFE Index -- arithmetic, market value-
weighted averages of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk and total return for equity funds.
NASDAQ Composite Index -- is a market capitalization, price only, unmanaged
index that tracks the performance of domestic common stocks traded on the
regular NASDAQ market as well as national market System traded foreign common
stocks and ADRs.
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Nekkei Stock Average - a price weighted index of 225 selected leading stocks
listed on the First Section of the Tokyo Stock Exchange.
New York Stock Exchange composite or component indices -- capitalization-
weighted unmanaged indices of all industrial, utilities, transportation and
finance stocks listed on the New York Stock Exchange.
Russell U.S. Equity Indexes:
----------------------------
Russell 3000(R) Index - measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell 1000(R) Index - an unmanaged index which measures the performance of
the 1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Russell 2000(R) Index -- an unmanaged index which measures the performance of
the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell Top 200(TM) Index - measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 74% of the
total market capitalization of the Russell 1000 Index.
Russell Mid-Cap(TM) Index -- measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 26% of the
total market capitalization of the Russell 1000 Index.
Russell 2500(TM) Index - an unmanaged index which measures the performance of
the 2,5000 smallest companies in the Russell 3000 Index, which represents
approximately 17% of the total market capitalization of the Russell 3000
Index.
Russell 3000(R) Growth Index - measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Growth or the Russell 2000 Growth indexes.
Russell 3000(R) Value Index - measures the performance of those Russell 3000
Index companies with lower price-to-book ratios and lower forecasted growth
values. The stocks in this index are also members of either the Russell 1000
Value or the Russell 2000 Value indexes.
Russell 1000(R) Growth Index - measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 1000(R) Value Index - measures the performance of those Russell 1000
with lower price-to-book ratios and lower forecasted growth values.
Russell 2000(R) Growth Index - measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2000(R) Value Index - measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200(TM) Growth Index - measures the performance of those Russell
Top 200 companies with higher price-to-book ratios and higher forecasted
growth values. The stocks re also members of the Russell 1000 Growth index.
Russell Top 200(TM) Value Index - measures the performance of those Russell
Top 200 companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
Russell Midcap(TM) Growth Index - measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index.
Russell Midcap(TM) Value Index - measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values. The stocks are also members of the Russell 1000 Value index.
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Russell 2500(TM) Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500(TM) Value Index - measures the performance of those Russell 2500
companies with lower price-to-book ratios and lower forecasted growth values.
Ryan Labs 5 Year GIC Master Index - an arithmetic mean of market rates of $1
million GIC contracts held for five years. The market rates are
representative of a diversified, investment grade portfolio of contracts
issued by credit worthy insurance companies. The index is unmanaged and does
not reflect any transaction costs. Direct investment in the index is not
possible.
Standard & Poor's U.S. Indices:
-------------------------------
In October, 1999, Standard & Poor's and Morgan Stanley Capital International
launched a new global industry classification standard consisting of 10
economic sectors aggregated from 23 industry groups, 59 industries, and 123
sub-industries covering almost 6,000 companies globally. The new
classification standard will be used with all of their respective indices.
Features of the new classification include 10 economic sectors, rather than
the 11 S&P currently uses. Sector and industry gradations are less severe.
Rather than jumping from 11 sectors to 115 industries under the former S&P
system, the new system progresses from 10 sectors through 23 industry groups,
50 industries and 123 sub-industries.
S&P 500 Index - an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks and 20 transportation stocks. Widely
regarded as the standard for measuring large-cap U.S. stock market
performance. It is used by 97% of U.S. money managers and pension plan
sponsors. More than $1 trillion is indexed to the S&P 500.
S&P MidCap 400 Index -- consists of 400 domestic stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index with each stock affecting the index in proportion to its market
value. It is used by over 95% of U.S. managers and pension plan sponsors. More
than $25 billion is indexed to the S&P Midcap400.
S&P Small Cap 600 Index - an unmanaged index comprised of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. The
index is comprised of stocks from the industrial, utility, financial, and
transportation sectors. It is gaining wide acceptance as the preferred
benchmark for both active and passive management due to its low turnover and
greater liquidity. Approximately $8 billion is indexed to the S&P SmallCap
600.
S&P SuperComposite 1500 - combines the S&P 500, MidCap 400, and SmallCap 600
indices, representing 87% of the total U.S. equity market capitalization.
S&P 100 Index - known by its ticker symbol OEX, this index measures large
company U.S. stock market performance. This market capitalization-weighted
index is made up of 100 major, blue chip stocks across diverse industry
groups.
S&P/BARRA Growth and Value Indices - are constructed by dividing the
securities in the S&P 500 Index according to price-to-book ratio. The Value
index contains the companies with the lower price-to-book ratios; while the
companies with the higher price-to-book ratios are contained in the Growth
index.
S&P REIT Composite Index - launched in 1997, this benchmark tracks the market
performance of U.S. Real Estate Investment Trusts, known as REITS. The REIT
Composite consists of 100 REITs chosen for their liquidity and importance in
representing a diversified real estate portfolio. The Index covers over 80%
of the securitized U.S. real estate market.
S&P Utilities Stock Price Index - a market capitalization weighted index
representing three utility groups and, with the three groups, 43 of the
largest utility companies listed on the New York Stock Exchange, including 23
electric power companies, 12 natural gas distributors and 8 telephone
companies.
Standard & Poor's CANADA Indices:
---------------------------------
S&P/TSE Canadian MidCap Index - measures the performance of the mid-size
company segment of the Canadian equity market.
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S&P/TSE Canadian SmallCap Index - Measures the small company segment of the
Canadian equity market.
Standard & Poor's Global Indices:
---------------------------------
S&P Global 1200 Index - aims to provide investors with an investable
portfolio. This index, which covers 29 countries and consists of seven
regional components, offers global investors an easily accessible, tradable
set of stocks and particularly suits the new generation of index products,
such as exchange-traded funds (ETFs).
S&P Euro and S&P Euro Plus Indices - the S&P Euro Index covers the Eurobloc
countries; the Euro Plus Index includes the Euro markets as well as Denmark,
Norway, Sweden and Switzerland. The S&P Euro Plus Index contains 200
constituents, and the S&P Euro Index, a subset of Euro Plus, contains 160
constituents. Both indices provide geographic and economic diversity over 11
industry sectors.
S&P/TSE 60 Index - developed with the Toronto Stock Exchange, is designed as
the new Canadian large cap benchmark and will ultimately replace the Toronto
35 and the TSE 100.
S&P/TOPIX 150 - includes 150 highly liquid securities selected from each
major sector of the Tokyo market. It is designed specifically to give
portfolio managers and derivative traders an index that is broad enough to
provide representation of the market, but narrow enough to ensure liquidity.
S&P Asia Pacific 100 Index - includes highly liquid securities from each major
economic sector of major Asia-Pacific equity markets. Seven countries --
Australia, Hong Kong, Korea, Malaysia, New Zealand, Singapore, and Taiwan --
are represented in the new index.
S&P Latin America 40 Index -part of the S&P Global 1200 Index, includes highly
liquid securities from major economic sectors of Mexican and South American
equity markets. Companies from Mexico, Brazil, Argentina, and Chile are
represented in the new index.
S&P United Kingdom 150 Index - includes 150 highly liquid securities selected
from each of the new S&P sectors. The S&P UK 150 is designed to be broad
enough to provide representation of the market, but narrow enough to ensure
liquidity.
Salomon Smith Barney Global excluding U.S. Equity Index - an unmanaged index
comprised of the smallest stocks (less than $1 billion market capitalization)
of the Extended Market Index, of both developed and emerging markets.
Salomon Smith Barney One to Three Year Treasury Index - an unmanaged index
comprised of U.S. treasury notes and bonds with maturities of one year or
greater, but less than three years.
Salomon Smith Barney Three-Month T-Bill Average -- the average for all
treasury bills for the previous three-month period.
Salomon Smith Barney Three-Month U.S. Treasury Bill Index - a return
equivalent yield average based on the last three 3-month Treasury bill issues.
Savings and Loan Historical Interest Rates -- as published by the U.S. Savings
and Loan League Fact Book.
Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates --
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. treasury bills and inflation.
Target Large Company Value Index - an index comprised of large companies with
market capitalizations currently extending down to approximately $1.9 billion
that are monitored using a variety of relative value criteria in order to
capture the most attractive value opportunities available. A high quality
profile is required and companies undergoing adverse financial pressures are
eliminated.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
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Value Line Composite Index -- composed of over 1,600 stocks in the Value Line
Investment Survey.
Wilshire Real Estate Securities Index - a market capitalization-weighted index
of publicly traded real estate securities, including real estate investment
trusts, real estate operating companies and partnerships. The index is used
by the institutional investment community as a broad measure of the
performance of public real estate equity for asset allocation and performance
comparison.
Wilshire REIT Index - includes 112 real estate investment trusts (REITs) but
excludes seven real estate operating companies that are included in the
Wilshire Real Estate Securities Index.
Note: With respect to the comparative measures of performance for equity
securities described herein, comparisons of performance assume reinvestment of
dividends, except as otherwise stated.
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