<PAGE>
Securities Act File No. 33-25355
Investment Company Act of 1940 File No. 811-5683
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 57 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 59 /X/
UAM FUNDS, INC.
(Exact Name of Registrant as specified in Charter)
c/o UAM Fund Services, Inc.
211 Congress St., 4/th/ Floor
Boston, Massachusetts 02110
Registrant's Telephone Number (617) 542-5440
(Address of Principal Executive Offices)
Linda T. Gibson, Senior Vice President
UAM Fund Services, Inc.
211 Congress Street
Boston, Massachusetts 02110
(Name and Address of Agent for Service)
COPY TO:
Audrey C. Talley, Esq.
Drinker Biddle & Reath LLP
One Logan Square
Philadelphia, PA 19103-6996
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] Immediately upon filing pursuant to Paragraph (b)
[_] on _________ pursuant to Paragraph (b)
[_] 60 days after filing pursuant to paragraph (a) (1)
[X] on December 29, 2000 pursuant to paragraph (a) (1)
[_] 75 days after filing pursuant to Paragraph (a) (2)
[_] on (date) pursuant to Paragraph (a) (2) of Rule 485.
<PAGE>
PART A
UAM FUNDS, INC.
The following prospectuses are included in this Post-Effective Amendment No. 57:
. Acadian Emerging Markets Portfolio Institutional Class Shares.
. The C&B Portfolios Institutional Class Shares.
. The DSI Portfolios Institutional Class Shares.
. FMA Small Company Portfolio Institutional Class Shares.
. FMA Small Company Portfolio Institutional Service Class Shares
. ICM Small Company Portfolio Institutional Class Shares.
. The McKee Portfolios Institutional Class Shares.
. The NWQ Special Equity Portfolio Institutional Class Shares.
. The NWQ Special Equity Portfolio Institutional Service Class Shares.
. The Rice, Hall, James Portfolios Institutional Class Shares.
. Sirach Portfolios Institutional Class Shares.
. Sirach Portfolios Institutional Service Class Shares.
. Sterling Partners' Portfolios Institutional Class Shares
. The TS&W Portfolios Institutional Class Shares.
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
Acadian Emerging Markets Portfolio
Institutional Class Shares Prospectus March 1, 2001
[LOGO OF UAM] (R)
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Fund Summary.................................................... 1
What is the Fund's Objective?................................ 1
What are the Fund's Principal Investment Strategies?......... 1
What are the Fund's Principal Risks?......................... 2
How has the Fund Performed?.................................. 3
What are the Fund's Fees And Expenses?....................... 3
Investing with the UAM Funds.................................... 5
Buying Shares................................................ 5
Redeeming Shares............................................. 6
Exchanging Shares............................................ 8
Transaction Policies......................................... 8
Account Policies............................................. 10
Additional Information About the Fund........................... 12
Other Investment Practices and Strategies.................... 12
Investment Management........................................ 13
Shareholder Servicing Arrangements........................... 13
Financial Highlights............................................ 15
</TABLE>
<PAGE>
Fund Summary
WHAT IS THE FUND'S OBJECTIVE?
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The fund seeks long-term capital appreciation by investing primarily in
common stocks of emerging country issuers. The fund may change its
investment objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
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The fund will invest primarily in common stocks, but also may invest in
other types of equity securities. Normally, the fund invests at least 65%
its total assets in equity securities of issuers that:
. Have their principal securities trading market in an emerging country.
. Alone or on a consolidated basis derive 50% or more of annual revenue
from goods produced, sales made or services performed in emerging
countries.
. Are organized under the laws of, and have a principal office in, an
emerging country.
An "emerging country" is any country that the adviser believes 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 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. The fund will focus its investments on those
emerging market countries that it believes have developing economies and
where the markets are becoming more sophisticated, including some or all of
the following:
Argentina Czech Israel Nigeria Sri Lanka
Botswana Republic Jamaica Pakistan Taiwan
Brazil Egypt Jordan Peru Thailand
Chile Greece Kenya Philippines Turkey
China Hungary Korea Poland Venezuela
Columbia India Malaysia South Africa Zimbabwe
Indonesia Mexico
1
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The fund may also invest in equity or debt securities of issuers located in
industrialized countries. As markets in other countries develop, the fund
expects to expand and further diversify the emerging countries in which it
invests.
The fund also may invest debt securities of issuers located in emerging
countries when the adviser believes that such debt securities offer
opportunities for long-term capital appreciation. In making such investment
decisions, the adviser generally considers the relative potential for
capital appreciation of equity securities, interest rate levels, economic
trends, currency trends and prospects, and, specifically, the prospects for
appreciation of selected debt issues. The fund may invest up to 10% of its
total assets (measured at the time of the investment) in debt securities
that are rated below investment-grade, otherwise known as "junk bonds".
WHAT ARE THE FUND'S PRINCIPAL RISKS?
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As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect the value of the
fund's shares and the total return on your investment include the
possibility that the equity securities held by the fund will experience
sudden, unpredictable drops in value or long periods of decline in value.
This may occur because of factors that affect the securities markets
generally, such as adverse changes in economic conditions, the general
outlook for corporate earnings, interest rates or investor sentiment.
Equity securities may also lose value because of factors affecting an
entire industry or sector, such as increases in production costs, or
factors directly related to a specific company, such as decisions made by
its management. This risk is greater for small and medium sized companies,
which tend to be more vulnerable to adverse developments than larger
companies.
When the fund invests in foreign securities, it will be subject to risks
not typically associated with domestic securities. Foreign investments,
especially investments in emerging markets, can be riskier and more
volatile than investments in the United States. Adverse political and
economic developments or changes in the value of foreign currency can make
it harder for the fund to sell its securities and could reduce the value of
your shares. Differences in tax and accounting standards and difficulties
in obtaining information about foreign companies can negatively affect
investment decisions. Unlike more established markets, emerging markets may
have governments that are less stable, markets that are less liquid and
economies that are less developed.
2
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HOW HAS THE FUND PERFORMED?
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The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares the average annual
returns of the fund to those of a broad-based securities market index.
Returns are based on past results and are not an indication of future
performance.
Calendar Year Returns
<TABLE>
1994 1995 1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C> <C>
- 2.07% -10.31% -12.05% -15.91% -21.04% 62.44%
</TABLE>
During the periods shown in the chart for the fund, the highest return for
a quarter was __.__% (quarter ending __/__/__) and the lowest return for a
quarter was __.__% (quarter ending __/__/__).
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 5 Years 6/17/93*
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Acadian Emerging Markets Portfolio
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IFC Investable Composite Index
* Beginning of operations. Index comparisons began on 6/30/93.
WHAT ARE THE FUND'S FEES AND EXPENSES?
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Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Acadian Emerging
Markets Portfolio
---------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
---------------------------------------------------------------------------
Redemption Fee (as a percentage of amount redeemed) 1.00%#
---------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from the assets
of the fund)
3
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Management Fee 1.00%
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Other Expenses+ [ ]%
---------------------------------------------------------------------------
Total Annual Fund Operating Expenses* [ ]%
# Shareholders pay a redemption fee when they redeem shares held
for less than the number of days listed under "Redemption Fee" in
the section on "Transaction Policies."
* "Other Expense" presented in the table above may be higher than
the expenses you would actually pay as a shareholder in the
portfolio. This is due to the fact that "Other Expenses" do not
take into account any expense offset arrangement the portfolio
may have that would reduce its custodian fee based on the amount
of cash the portfolio maintains with its custodian. Such an
arrangement would have the effect of reducing the portfolio's
expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
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4
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Investing With the UAM Funds
BUYING SHARES
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By Mail
You can open an account with the fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept third-
party checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the
UAM Funds. Be sure your check identifies clearly your name, your account
number and the fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to
the UAM Funds. Finally, wire your money using the wiring instructions set
forth below. To add to an existing account by wire, call 1-877-826-5465 to
get a wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
5
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to
cancel or change it.
Minimum Investments
You can open an account with the fund with a minimum initial investment of
$100,000. You can buy additional shares for as little as $1,000.
Fund Codes
The fund's reference information, which is listed below, will be helpful to
you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
Trading Symbol CUSIP Fund Code
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AEMGX 902555200 627
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you need
more information.
6
<PAGE>
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you
must complete the appropriate sections of the account application and mail
it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login
information, including your personal identification number (PIN), please
call 1-877-826-5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial
institution. To participate in this service, you must complete the
appropriate sections of the account application and mail it to the UAM
Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in
proper form.
The UAM Funds may require that a bank or member firm of a national
securities exchange guarantee signatures. A notary public cannot guarantee
a signature. Signature guarantees are for the protection of shareholders.
Before they grant a redemption request, the UAM Funds may require a
shareholder to furnish additional legal documents to insure proper
authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check, bank check or money order.
7
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may
suspend your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
You can also exchange shares of the UAM Funds on the Internet at
www.uam.com. For login information, including your personal identification
-----------
number (PIN), please call 1-877-826-5465. Before exchanging your shares,
please read the prospectus of the UAM Fund for which you want to exchange.
You may obtain any UAM Fund prospectus by calling 1-877-826-5465. You may
only exchange shares between accounts with identical registrations (i.e.,
the same names and addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
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Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days
when the New York Stock Exchange is closed, the value of a UAM Fund may
change on days when you are unable to purchase or redeem shares.
8
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their
assets, subtracting their liabilities and then dividing the result by the
number of shares outstanding. The UAM Funds use current market prices to
value their investments. However, the UAM Funds may value investments at
fair value when market prices are not readily available or when events
occur that make established valuation methods (such as stock exchange
closing prices) unreliable. The UAM Funds will determine an investment's
fair value according to methods established by the Board. The UAM Funds
value debt securities that are purchased with remaining maturities of 60
days or less at amortized cost, which approximates market value. The UAM
Funds may use a pricing service to value some of their assets, such as debt
securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy or
sell shares at the NAV of any given day your financial intermediary must
receive your order before the close of trading on the New York Stock
Exchange that day. Your financial intermediary is responsible for
transmitting all purchase and redemption requests, investment information,
documentation and money to the UAM Funds on time. Your financial
intermediary may charge additional transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do
so, it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities
instead of cash.
Redemption Fee
The fund will deduct a 1.00% redemption fee from the redemption proceeds of
any shareholder redeeming shares of the fund held for less than ninety
days.
The fund will retain the fee for the benefit of the remaining shareholders.
The fund charges the redemption fee to help minimize the impact the
redemption may have on the performance of the fund, to facilitate fund
management and to offset certain transaction costs and other expenses the
fund incurs because of the redemption. The fund also charges the redemption
fee to discourage market timing by those shareholders initiating
redemptions to take advantage of short-term market movements.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The UAM Funds will not
be responsible for any loss, liability, cost or expense for following
instructions received by telephone reasonably believed to be genuine.
9
<PAGE>
ACCOUNT POLICIES
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Small Accounts
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial investment.
This provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations
and not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, the fund distributes its net investment income and its net
capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of the fund
unless you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in the fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such
accounts may, however, be taxable at some time in the future. You should
always consult your tax advisor for specific guidance regarding the tax
effect of your investment in the UAM Funds.
Taxes on Distributions Distributions of the fund will generally be taxable
to shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time the fund held its
investments, not how long you held your shares. Dividends and distributions
of short-term capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as long-
term capital gains. Once a year UAM Funds will send you a statement showing
the types and total amount of distributions you received during the
previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In
this case, you would be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of your investment. This is known as "buying a
dividend" and should be avoided.
10
<PAGE>
The fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received
deduction, subject to certain holding period requirements and financing
limitations.
If the fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the fund received
from sources in foreign countries. The fund may elect to treat some of
those taxes as a distribution to shareholders, which would allow
shareholders to offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in
the fund, you may recognize a capital gain or loss for federal tax
purposes. This gain or loss will be based on the difference between the
cost of your shares (tax basis) and the amount you receive for them. To aid
in computing your tax basis, you should keep your account statements for
the periods during which you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you
realize on shares held for six months or less will be treated as a long-
term capital loss to the extent of any long-term capital gain distributions
you received on the shares.
Backup Withholding By law, the fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct
taxpayer information, (ii) to properly include on your return payments of
taxable interest or dividends, or (iii) to certify to the fund that you are
not subject to back-up withholding when required to do so or that you are
an "exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of
distributions that are attributable to interest on federal securities. As
mentioned above, you should always consult your tax advisor for specific
guidance regarding the tax effect of your investment in the fund.
11
<PAGE>
Additional Information About the Fund
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, the fund may use the
investment strategies described below. The fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of the fund's investment practices and its risks, you should read the
SAI.
Derivatives
The fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify the fund's gains or losses. There are various factors that
affect the fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives the
fund buys or sells. The fund could be negatively affected if the change in
market value of its securities fails to correlate perfectly with the values
of the derivatives it purchased or sold.
Short-Term Investing
At times, the adviser may decide to invest up to 100% of the fund's assets
in a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities
for temporary defensive purposes, to earn a return on uninvested assets or
to meet redemptions. The adviser may temporarily adopt a defensive position
to reduce changes in the value of the shares of the fund that may result
from adverse market, economic, political or other developments. When the
adviser pursues a temporary defensive strategy, the fund may not profit
from favorable developments that it would have otherwise profited from if
it were pursuing its normal strategies. Likewise, these strategies may
prevent the fund from achieving its stated objectives.
12
<PAGE>
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
Acadian Asset Management, Inc., a Massachusetts corporation located at Ten
Post Office Square, Boston, Massachusetts 02109, is the fund's investment
adviser. The adviser manages and supervises the investment of the fund's
assets on a discretionary basis. The adviser 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 fund has agreed to pay the adviser a management
fee equal to 1.00% of the fund's average net assets.
Portfolio Managers
A team of the adviser's investment professionals has primary responsibility
for the day-to-day management of the fund.
SHAREHOLDER SERVICING ARRANGEMENTS
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Brokers, dealers, banks, trust companies and other financial
representatives may receive compensation from the fund or its service
providers for providing a variety of services. This section briefly
describes how the financial representatives may get paid.
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of the fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with the
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of the fund or for servicing
your account. Your financial representative should provide you with a
schedule of its fees and services.
The fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure
that the fees paid are appropriate for the services performed. The fund
does not pay these service fees on shares purchased directly. In addition,
the adviser and its affiliates may, at their own expense, pay financial
representatives for these services.
UAM Fund Distributors, Inc., the fund's principal underwriter, may
participate in arrangements with selling dealers where the selling dealer
waives its right to distribution or shareholder servicing fees for selling
fund shares or servicing shareholder accounts. These arrangements typically
are intended to avoid duplicate payment of fees where the selling dealers
transactions are through an omnibus account with a different clearing
broker, and that broker is entitled to receive distribution and/or
servicing fees from the fund.
13
<PAGE>
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to the fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to the fund.
14
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
financial performance of the fund for the fiscal periods indicated. Certain
information contained in the table reflects the financial results for a
single share. The total returns in the table represent the rate that an
investor would have earned on an investment in the fund assuming all
dividends and distributions were reinvested. PricewaterhouseCoopers LLP has
audited this information. The financial statements and the unqualified
opinion of PricewaterhouseCoopers LLP are included in the annual report of
the fund, which is available upon request by calling the UAM Funds at
1-877-826-5465.
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999* 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 6.75 $ 11.28 $ 12.12 $ 11.23
Income from Investment Operations:
Net Investment Income 0.10 0.11 0.16 0.13
Net Realized and Unrealized Gain (Loss) 2.63 (3.99)# (0.85) 0.84
Total From Investment Operations 2.73 (3.88) (0.69) 0.97
Distributions:
Net Investment Income (0.09) (0.14) (0.12) (0.02)
Net Realized Gain _ (0.51) (0.03) (0.06)
Total Distributions (0.09) (0.65) (0.15) (0.08)
Net Asset Value, End of Period $ 9.39 $ 6.75 $ 11.28 $ 12.12
Total Return 41.49% (36.00)% (5.71)% 8.72%
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $77,019 $88,665 $80,220 $69,649
Ratio of Expenses to Average Net Assets 1.61%@ 1.61%@ 1.50% 1.79%
Ratio of Net Investment Income to
Average Net Assets 1.11% 1.60% 1.31% 1.29%
Portfolio Turnover Rate 45% 32% 28% 11%
</TABLE>
* Per share amounts for the period are based on average outstanding
shares.
# The amount shown for the year ended October 31, 1998 for a share
outstanding throughout the period does not accord with the aggregate
net gains on investments for that period because of the sales and
repurchases of portfolio shares in relation to fluctuating market
value of investments of the portfolio.
@ The ratio of net operating expenses to average net assets, excluding
foreign tax expense, is 1.53% and 1.59% for the year ended October 31,
1999 and 1998, respectively.
15
<PAGE>
Acadian Emerging Markets Portfolio
Investors who want more information about the fund should read the fund's
annual/semi-annual reports and the fund's statement of additional
information. The annual/semi-annual reports of the fund provide additional
information about its investments. In the annual report, you will also find
a discussion of the market conditions and investment strategies that
significantly affected the performance of the fund during the last fiscal
year. The statement of additional information contains additional detailed
information about the fund and is incorporated by reference into (legally
part of) this prospectus.
Investors can receive free copies of the statement of additional
information, shareholder reports and other information about the UAM Funds
and can make shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about the fund (including the statement
of additional information) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get information on the
operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-202-942-8090. Reports and other information about
the fund are available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov. You may obtain copies of
------------------
this information, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
------------------
Securities and Exchange Commission's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
[LOGO OF UAM](R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
C&B Portfolios
Institutional Class Shares Prospectus March 1, 2001
C&B Balanced Portfolio
C&B Equity Portfolio
C&B Mid Cap Equity Portfolio
C&B Equity Portfolio for Taxable Investors
[LOGO OF UAM](R)
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this
prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
C&B Equity Portfolio......................................... 1
What are the Fund's Objectives?............................. 1
What are the Fund's Principal Investment Strategies?........ 1
What are the Fund's Principal Risks?........................ 2
How has the Fund Performed?................................. 3
What are the Fund's Fees and Expenses?...................... 3
C&B Equity Portfolio for Taxable Investors................... 5
What are the Fund's Objectives?............................. 5
What are the Fund's Principal Investment Strategies?........ 5
What are the Fund's Principal Risks?........................ 6
How has the Fund Performed?................................. 7
What are the Fund's Fees and Expenses?...................... 8
C&B Mid Cap Equity Portfolio................................. 9
What are the Fund's Objectives?............................. 9
What are the Fund's Principal Investment Strategies?........ 9
What are the Fund's Principal Risks?........................ 10
How has the Fund Performed?................................. 11
What are the Fund's Fees and Expenses?...................... 12
C&B Balanced Portfolio....................................... 13
What are the Fund's Objectives?............................. 13
What are the Fund's Principal Investment Strategies?........ 13
What are the Fund's Principal Risks?........................ 14
How has the Fund Performed?................................. 15
What are the Fund's Fees and Expenses?...................... 16
Investing with the UAM Funds................................. 17
Buying Shares............................................... 17
Redeeming Shares............................................ 18
Exchanging Shares........................................... 20
Transaction Policies........................................ 20
Account Policies............................................ 22
Additional Information about the Funds....................... 24
Other Investment Practices and Strategies................... 24
Investment Management....................................... 25
Shareholder Servicing Arrangements.......................... 26
Financial Highlights......................................... 27
C&B Equity Portfolio........................................ 27
C&B Equity Portfolio for Taxable Investors.................. 28
C&B Mid Cap Equity Portfolio................................ 28
C&B Balanced Portfolio...................................... 29
</TABLE>
<PAGE>
CB: Equity Portfolio for taxable Investors
C&B Equity Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Equity Portfolio seeks maximum long-term total return with minimal risk
to principal by investing in common stocks that have a consistency and
predictability in their earnings growth. The fund may change its objective
without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
----------------------------------------------------
Normally, the Equity Portfolio seeks to achieve its goal by investing
primarily in common stocks of companies of any size. The fund may also
invest in other types of equity securities.
The fund invests primarily in companies that the adviser believes are
undervalued and possess strong financial positions and consistent and
predictable earnings growth. The adviser selects equity securities for the
fund based on its analysis of a company's financial characteristics, an
assessment of the quality of a company's management, and the implementation
of valuation discipline. The adviser determines which companies are
acceptable for investment by screening criteria such as:
. High return on equity.
. Strong balance sheets.
. Industry leadership position.
. An ability to generate excess cash flow, and opportunities to reinvest
that cash at attractive rates of return.
. Excellent fixed cost coverage ratios.
. A dividend and/or share repurchase policy that is beneficial to
investors.
The adviser further narrows the universe of acceptable investments by
undertaking intensive on-site research, including interviews with top
management, to identify companies with strong management.
The adviser bases a common stock's value on the payment of a future stream
of anticipated dividends. Using a dividend discount analysis, the adviser
determines those stocks with the most attractive returns from this
universe. The adviser then compares the expected internal rate of return
for each company to the rate of return from intermediate-term U.S. Treasury
notes. The fund buys and sells equity securities depending on the amount by
which the expected rate of return of the security exceeds the return of
U.S. Treasury notes.
1
<PAGE>
The adviser believes that the companies that survive its rigorous
evaluation process are high-quality, well-managed companies that may be
less volatile than the stock market in difficult economic environments.
Generally, the adviser prefers to hold a smaller number of securities in
the fund, e.g., stocks of 25 to 40 companies. In this manner, the adviser
seeks to provide adequate diversification while allowing the composition of
the fund and performance to behave differently than the overall market.
Adherence to this philosophy has resulted in a pattern of results quite
different from that of the market. The adviser believes that its emphasis
on quality and low risk will protect the fund's assets in down markets,
while its insistence on stability of earnings and dividends growth,
financial strength, leadership position and strong cash flow will produce
competitive results in all but the most speculative markets. Over the long
term, the adviser believes these factors should result in superior returns
with reduced risk.
The adviser regularly reviews the investments of the fund. The fund sells
securities when the adviser believes:
. They are no longer attractive because of price appreciation.
. The fundamental outlook of the company has changed significantly.
. Alternatives that are more attractive are available.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management. This risk
is greater for small and medium sized companies, which tend to be more
vulnerable to adverse developments than larger companies.
2
<PAGE>
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares average annual returns
the fund to those of a broad-based securities market index. Returns are
based on past results and are not an indication of future performance.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
31.07% 4.41% 4.20% 1.35% 31.91% 20.22% 27.98% 8.04% 2.06% [ ]
</TABLE>
Calendar Year Returns
During the periods shown in the chart for the fund, the highest return for a
quarter was ____% (quarter ending ____) and the lowest return for a quarter
was ___% (quarter ending ____).
Average Annual Returns For Periods Ended December 31, 2000
<TABLE>
<CAPTION>
Since
-----
1 Year 2/18/98*
---------------------------------------------------------------------------
<S> <C> <C>
Mid Cap Equity Portfolio []% []%
---------------------------------------------------------------------------
Russell Mid-Cap Value Index []% []%
---------------------------------------------------------------------------
Russell Mid-Cap Index [] []%
---------------------------------------------------------------------------
</TABLE>
+ Beginning this period the fund has changed its comparative broad-based
securities market index from the Russell Mid Cap Index Index to the
Russell Mid Cap Value Index because it is a more appropriate benchmark
for this type of fund.
WHAT ARE THE FUND'S FEES AND EXPENSES?
-------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.63%
Other Expenses _.__%
---------------------------------------------------------------------------
Total Annual Fund Operating Expenses _.__%
3
<PAGE>
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
4
<PAGE>
C&B Equity Portfolio for Taxable Investors
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Equity Portfolio for Taxable Investors seeks maximum long-term, after-
tax total return, consistent with minimizing risk to principal. The fund
may not change its objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
Normally, the Equity Portfolio for Taxable Investors seeks to achieve its
goal by investing primarily in common stocks of companies of any size. The
adviser will try to minimize tax consequences for the fund's shareholders
by managing the amount of realized gains, which it attempts to control by
minimizing portfolio turnover. A fund's portfolio turnover rate is the
frequency with which it buys and sells securities. A rate of turnover of
100% would occur, for example, if the fund replaced all of the securities
it held within one year. As discussed under "Federal Taxes," taxable gains
realized from the sale of securities are distributed to investors every
year. It is impossible to predict the impact of such a strategy on the
realization of gains or losses for the fund. For example, the fund may
forego the opportunity to realize gains or reduce losses because of this
policy. The adviser intends to balance these tax considerations with fund
trading needs and reserves the right to engage in short-term trading if
market conditions warrant such trading. The fund may also invest in other
types of equity securities.
The fund invests primarily in companies that the adviser believes are
undervalued and possess strong financial positions and consistent and
predictable earnings growth. The adviser selects equity securities for the
fund based on its analysis of a company's financial characteristics, an
assessment of the quality of a company's management, and the implementation
of valuation discipline. The adviser determines which companies are
acceptable for investment by screening criteria such as:
. High return on equity.
. Strong balance sheets.
. Industry leadership position.
. An ability to generate excess cash flow, and opportunities to reinvest
that cash at attractive rates of return.
. Excellent fixed cost coverage ratios.
. A dividend and/or share repurchase policy that is beneficial to
investors.
5
<PAGE>
The adviser further narrows the universe of acceptable investments by
undertaking intensive on-site research, including interviews with top
management, to identify companies with strong management.
The adviser bases a common stock's value on the payment of a future stream
of anticipated dividends. Using a dividend discount analysis, the adviser
determines those stocks with the most attractive returns from this
universe. The adviser then compares the expected internal rate of return
for each company to the rate of return from intermediate-term U.S. Treasury
notes. The fund buys and sells equity securities depending on the amount by
which the expected rate of return of the security exceeds the return of
U.S. Treasury notes.
The adviser believes that the companies that survive its rigorous
evaluation process are high-quality, well-managed companies, which may be
less volatile than the stock market in difficult economic environments.
Generally, the adviser prefers to hold a smaller number of securities in
the fund, e.g., stocks of 25 to 40 companies. In this manner, the adviser
seeks to provide adequate diversification while allowing the composition of
the fund and performance to behave differently than the overall market.
Adherence to this philosophy has resulted in a pattern of results quite
different from that of the market. The adviser believes that its emphasis
on quality and low risk will protect the fund's' assets in down markets,
while its insistence on stability of earnings and dividends growth,
financial strength, leadership position and strong cash flow will produce
competitive results in all but the most speculative markets. Over the long
term, the adviser believes these factors should result in superior returns
with reduced risk.
The adviser regularly reviews the investments of the fund. The fund sells
securities when the adviser believes:
. They are no longer attractive because of price appreciation.
. The fundamental outlook of the company has changed significantly.
. Alternatives that are more attractive are available.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in
6
<PAGE>
value or long periods of decline in value. This may occur because of
factors that affect the securities markets generally, such as adverse
changes in economic conditions, the general outlook for corporate earnings,
interest rates or investor sentiment. Equity securities may also lose value
because of factors affecting an entire industry or sector, such as
increases in production costs, or factors directly related to a specific
company, such as decisions made by its management. This risk is greater for
small and medium sized companies, which tend to be more vulnerable to
adverse developments than larger companies.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares average annual returns
the fund to those of a broad-based securities market index. Returns are
based on past results and are not an indication of future performance.
Calendar Year Returns
During the periods shown in the chart for the fund, the highest return for
a quarter was ___% (quarter ending ________) and the lowest return for a
quarter was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31, 2000
1998 1999 2000
9.38% 5.55% [ ]
Since
1 Year 02/12/97*
---------------------------------------------------------------------------
C&B Equity Portfolio for Taxable Investors
---------------------------------------------------------------------------
S&P 500 Index
* Beginning of operations. Index comparisons begin on January 31, 1997.
7
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Shareholder Fees (fees paid directly from your investment)
Redemption Fee (as a percentage of amount redeemed) 1.00%
Annual Fund Operating Expenses (expenses that are deducted
from the assets of a portfolio)
Management Fees 0.63%
Other Expenses* _.__%
---------------------------------------------------------------------------
Total Annual Fund Operating Expenses _.__%
# Shareholders pay a redemption fee when they redeem shares held for less
than the number of days listed under "Redemption Fee" in the section on
"Redeeming Shares."
* "Other Expenses" presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because the
adviser has voluntarily agreed to limit the expenses of the fund to the
extent necessary to keep its total expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) from exceeding 1.00% of
its average daily net assets. The adviser may change or cancel its expense
limitation at any time. In addition, "Other Expenses" do not take into
account any expense offset arrangement the fund may have that would reduce
its custodian fee based on the amount of cash the fund maintains with its
custodian. This would also have the effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
8
<PAGE>
C&B Mid Cap Equity Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Mid Cap Portfolio seeks maximum long-term total return, consistent with
minimizing risk to principal. The fund may change its investment objective
without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Mid Cap Equity Portfolio normally seeks its objective by investing
primarily in common stocks of companies with middle market capitalizations
at the time of initial investment. The fund considers a company to have a
middle market capitalization when its market capitalization is in the range
of $500 million to $5 billion or when its market capitalization falls
within the market capitalization range of the Russell Mid Cap Value Index.
The fund, however, will not necessarily sell stocks of companies whose
market capitalizations drifts outside of this range. As of December __,
2000, the Russell Mid Cap Value Index had a weighted average market
capitalization of $_.__ billion. As of the same date the smallest company
in the Russell Mid Cap Value Index has a market capitalization of
$_.__million and the largest company had a market capitalization
$_.__billion. The fund may also invest in other types of equity securities.
The fund invests primarily in companies that the adviser believes are
undervalued and possess strong financial positions and consistent and
predictable earnings growth. The adviser selects equity securities for the
fund based on its analysis of a company's financial characteristics, an
assessment of the quality of a company's management, and the implementation
of valuation discipline. The adviser determines which companies are
acceptable for investment by screening criteria such as:
. High return on equity.
. Strong balance sheets.
. Industry leadership position.
. An ability to generate excess cash flow, and opportunities to reinvest
that cash at attractive rates of return.
. Excellent fixed cost coverage ratios.
. A dividend and/or share repurchase policy that is beneficial to
investors.
The adviser further narrows the universe of acceptable investments by
undertaking intensive on-site research, including interviews with top
management, to identify companies with strong management.
The adviser bases a common stock's value on the payment of a future stream
of anticipated dividends. Using a dividend discount analysis, the adviser
determines those stocks with the most attractive returns from this
universe.
9
<PAGE>
The adviser then compares the expected internal rate of return for each
company to the rate of return from intermediate-term U.S. Treasury notes.
The fund buys and sells equity securities depending on the amount by which
the expected rate of return of the security exceeds the return of U.S.
Treasury notes.
The adviser believes that the companies that survive its rigorous
evaluation process are high-quality, well-managed companies, which may be
less volatile than the stock market in difficult economic environments.
Generally, the adviser prefers to hold a smaller number of securities in
the fund, e.g., stocks of 25 to 40 companies. In this manner, the adviser
seeks to provide adequate diversification while allowing the composition of
the fund and performance to behave differently than the overall market.
Adherence to this philosophy has resulted in a pattern of results quite
different from that of the market. The adviser believes that its emphasis
on quality and low risk will protect the fund's' assets in down markets,
while its insistence on stability of earnings and dividends growth,
financial strength, leadership position and strong cash flow will produce
competitive results in all but the most speculative markets. Over the long
term, the adviser believes these factors should result in superior returns
with reduced risk.
The adviser regularly reviews the investments of the fund. The fund sells
securities when the adviser believes:
. They are no longer attractive because of price appreciation.
. The fundamental outlook of the company has changed significantly.
. Alternatives that are more attractive are available.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management.
10
<PAGE>
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have
narrower product lines and more limited financial resources. Their stocks
may trade less frequently and in limited volume.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares average annual returns
the fund to those of a broad-based securities market index. Returns are
based on past results and are not an indication of future performance.
Calendar Year Returns
1999 -0.19%
During the periods shown in the chart for the fund, the highest return for
a quarter was ___% (quarter ending ________) and the lowest return for a
quarter was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 2/18/98*
===============================================================
Mid Cap Equity Portfolio [ ]% [ ]%
---------------------------------------------------------------
Russell Mid-Cap Value Index+ [ ]% [ ]%
---------------------------------------------------------------
Russell Mid-Cap Index+ [ ] [ ]%
---------------------------------------------------------------
+ Beginning this period the fund has changed its comparative broad-based
securities market index from the Russell Mid Cap Index to the Russell Mid Cap
Value Index because it is a more appropriate benchmark for this type of fund.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
11
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.63%
Other Expenses* _.__%
===========================================================================
Total Annual Fund Operating Expenses _.__%
* "Other Expenses" presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because the
adviser has voluntarily agreed to limit the expenses of the fund to the
extent necessary to keep its total expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) from exceeding 1.00% of
its average daily net assets. The adviser may change or cancel its expense
limitation at any time. In addition, "Other Expenses" do not take into
account any expense offset arrangement the fund may have that would reduce
its custodian fee based on the amount of cash the fund maintains with its
custodian. This would also have the effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
===========================================================================
12
<PAGE>
C&B Balanced Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Balanced Portfolio seeks maximum long-term total return with minimal
risk to principal by investing in a combined portfolio of common stocks
that have a consistency and predictability in their earnings growth and
investment grade debt securities. The fund may change its investment
objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
Typically, the Balanced Portfolio seeks its objective by investing 60% of
its assets in common stocks and 40% in debt securities, although the
adviser may vary the composition of the fund as market conditions warrant.
The fund will invest at least 25% of its total assets in senior debt
securities, including preferred stock. The debt portion of the fund will
primarily consist of investment-grade debt securities. The fund usually
holds bonds until maturity. The fund may invest in equity securities of
companies of any size. The fund may also invest in other types of equity
securities. There are three elements to the adviser's fixed income
investment philosophy: Quality: The adviser selects debt securities for the
fund by applying the same qualitative and quantitative criteria that it
uses in analyzing equity securities.
Stability/predictability: The adviser invests in debt securities in order
to maximize the fund's current return and to minimize the volatility of
inherent in zero coupon bonds.
Staggered maturities: The adviser usually staggers the maturities of the
debt securities held by the fund. The fund's average maturity will range
from approximately 4 to 1- years and its average duration will range from 3
to 9 years. The fund invests in debt securities other than U.S. Treasury
securities when the adviser feels that the yield spread of such securities
justifies any increased risk over U.S. Treasury securities.
The adviser selects equity securities for the fund based on its analysis of
a company's financial characteristics, an assessment of the quality of a
company's management, and the implementation of valuation discipline. The
adviser determines which companies are acceptable for investment by
screening criteria such as:
. High return on equity.
. Strong balance sheets.
. Industry leadership position.
. An ability to generate excess cash flow, and opportunities to reinvest
that cash at attractive rates of return.
. Excellent fixed cost coverage ratios.
. A dividend and/or share repurchase policy that is beneficial to
investors.
The adviser further narrows the universe of acceptable investments by
undertaking intensive on-site research, including interviews with top
management, to identify companies with strong management.
The adviser bases a common stock's value on the payment of a future stream
of anticipated dividends. Using a dividend discount analysis, the adviser
determines those stocks with the most attractive returns from this
universe. The adviser then compares the expected internal rate of return
for each
13
<PAGE>
company to the rate of return from intermediate-term U.S. Treasury
notes. The fund buys and sells equity securities depending on the amount by
which the expected rate of return of the security exceeds the return of
U.S. Treasury notes.
The adviser believes that the companies that survive its rigorous
evaluation process are high-quality, well-managed companies, that may be
less volatile than the stock market in difficult economic environments.
Generally, the adviser prefers to hold a smaller number of securities in
the fund, e.g., stocks of 25 to 40 companies. In this manner, the adviser
seeks to provide adequate diversification while allowing the composition of
the fund and performance to behave differently than the overall market.
Adherence to this philosophy has resulted in a pattern of results quite
different from that of the market. The adviser believes that its emphasis
on quality and low risk will protect the fund's' assets in down markets,
while its insistence on stability of earnings and dividends growth,
financial strength, leadership position and strong cash flow will produce
competitive results in all but the most speculative markets. Over the long
term, the adviser believes these factors should result in superior returns
with reduced risk.
The adviser regularly reviews the investments of the fund. The fund sells
securities when the adviser believes:
. Believes they are no longer attractive because of price appreciation.
. The fundamental outlook of the company has changed significantly.
. Alternatives that are more attractive are available.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did
14
<PAGE>
not implement its strategy properly. The fund's shares are not bank
deposits and are not guaranteed, endorsed or insured by any financial
institution, government authority or the FDIC. You may lose money by
investing in the fund.
As with most funds that invest in debt securities, changes in interest
rates are one of the most important factors that could affect the value of
your investment. Rising interest rates tend to cause the prices of debt
securities (especially those with longer maturities), and a fund's share
price, to fall. Rising interest rates may also cause investors to pay off
mortgage-backed and asset-backed securities later than anticipated, forcing
the fund to keep its money invested at lower rates. Falling interest rates,
however, generally cause investors to pay off mortgage-backed and asset-
backed securities earlier than expected, forcing a fund to reinvest the
money at a lower interest rate.
The credit rating or financial condition of an issuer may affect the value
of a debt security. The issuer of an investment-grade security 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.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management. This risk
is greater for small and medium sized companies, which tend to be more
vulnerable to adverse developments than larger companies.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares average annual returns
the fund to those of a broad-based securities market index. Returns are
based on past results and are not an indication of future performance.
Calendar Year Returns
15
<PAGE>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
[_] 5.52% 6.40% 0.94% [_] 12.97% [_] 8.36% 0.06% [_]
During the periods shown in the chart for the fund, the highest return for
a quarter was ____% (quarter ending _____) and the lowest return for a
quarter was ____% (quarter ending ____).
Average Annual Returns For Periods Ended December 31, 2000
1 Year 5 Years 10 Years
===========================================================================
C&B Balanced Portfolio
---------------------------------------------------------------------------
S&P 500 Index
---------------------------------------------------------------------------
Lehman Brothers Government/Corporate Index
---------------------------------------------------------------------------
Balanced Composite
WHAT ARE THE FUND'S FEES AND EXPENSES?
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.63%
Other Expenses* _.__%
===========================================================================
Total Annual Fund Operating Expenses _.__%
* "Other Expenses" presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because the
adviser has voluntarily agreed to limit the expenses of the fund to the
extent necessary to keep its total expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) from exceeding 1.00% of
its average daily net assets. The adviser may change or cancel its expense
limitation at any time. In addition "Other Expenses" do not take into
account any expense offset arrangement the fund may have that would reduce
its custodian fee based on the amount of cash the fund maintains with its
custodian. This would also have the effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
===========================================================================
16
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with a fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept third-
party checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the
UAM Funds. Be sure your check identifies clearly your name, your account
number and a fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to
the UAM Funds. Finally, wire your money using the wiring instructions set
forth below. To add to an existing account by wire, call 1-877-826-5465 to
get a wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
17
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to
cancel or change it.
Minimum Investments
You can open an account with either fund with a minimum initial investment
of $2,500 ($500 for individual retirement accounts (IRAs) and $250 for
Spousal IRAs). You can buy additional shares for as little as $100.
Fund Codes
Each fund's reference information, which is listed below, will be helpful
to you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
Fund Name Trading Symbol CUSIP Fund
Code
===========================================================================
C&B Equity Portfolio CBEQX 902555606 632
---------------------------------------------------------------------------
C&B Equity Portfolio for Taxable Investors N/A 902555390 633
---------------------------------------------------------------------------
C&B Mid Cap Equity Portfolio N/A 902555382 634
---------------------------------------------------------------------------
C&B Balanced Portfolio CBBAX 902555507 631
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
18
<PAGE>
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you
need more information.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you
must complete the appropriate sections of the account application and mail
it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login
-----------
information, including your personal identification number (PIN), please
call 1-877-826-5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial
institution. To participate in this service, you must complete the
appropriate sections of the account application and mail it to the UAM
Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in
proper form.
The UAM Funds may require that a bank or member firm of a national
securities exchange guarantee signatures. A notary public cannot guarantee
a signature. Signature guarantees are for the protection of shareholders.
Before they grant a redemption request, the UAM Funds may require a
shareholder to furnish additional legal documents to insure proper
authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check, bank check or money order.
19
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may
suspend your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
You can also exchange shares of the UAM Funds on the Internet at
www.uam.com. For login information, including your personal identification
-----------
number (PIN), please call 1-877-826-5465. Before exchanging your shares,
please read the prospectus of the UAM Fund for which you want to exchange.
You may obtain any UAM Fund prospectus by calling 1-877-826-5465. You may
only exchange shares between accounts with identical registrations (i.e.,
the same names and addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days
when the New York Stock Exchange is closed, the value of a UAM Fund may
change on days when you are unable to purchase or redeem shares.
20
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their assets,
subtracting their liabilities and then dividing the result by the number of
shares outstanding. The UAM Funds use current market prices to value their
investments. However, the UAM Funds may value investments at fair value when
market prices are not readily available or when events occur that make
established valuation methods (such as stock exchange closing prices)
unreliable. The UAM Funds will determine an investment's fair value according
to methods established by the Board. The UAM Funds value debt securities that
are purchased with remaining maturities of 60 days or less at amortized cost,
which approximates market value. The UAM Funds may use a pricing service to
value some of their assets, such as debt securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial intermediary
(such as a financial planner or adviser). Generally, to buy or sell shares at
the NAV of any given day your financial intermediary must receive your order
before the close of trading on the New York Stock Exchange that day. Your
financial intermediary is responsible for transmitting all purchase and
redemption requests, investment information, documentation and money to the
UAM Funds on time. Your financial intermediary may charge additional
transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that allow
them to enter confirmed purchase or redemption orders on behalf of clients and
customers. Under this arrangement, the financial intermediary must send your
payment to the UAM Funds by the time they price their shares on the following
business day. If your financial intermediary fails to do so, it may be
responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities instead
of cash.
Redemption Fee
The Equity Portfolio for Taxable Investors will deduct a 1.00% redemption fee
from the redemption proceeds of any shareholder redeeming shares of the fund
held for less than twelve months.
The fund will retain the fee for the benefit of the remaining shareholders.
The fund charges the redemption fee to help minimize the impact the redemption
may have on the performance of the fund, to facilitate fund management and to
offset certain transaction costs and other expenses the fund incurs because of
the redemption. The fund also charges the redemption fee to discourage market
timing by those shareholders initiating redemptions to take advantage of
short-term market movements.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The UAM Funds will not be responsible
for any loss, liability, cost or expense for following instructions received
by telephone reasonably believed to be genuine.
21
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value of
your account falls below 50% of the required minimum initial investment. This
provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations and not
your redemptions.
The UAM Funds will notify you before liquidating your account and allow you 60
days to increase the value of your account.
Distributions
Normally, each fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of a fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of investing
in a fund. This summary does not apply to shares held in an individual
retirement account or other tax-qualified plan, which are not subject to
current tax. Transactions relating to shares held in such accounts may,
however, be taxable at some time in the future. You should always consult your
tax advisor for specific guidance regarding the tax effect of your investment
in the UAM Funds.
Taxes on Distributions Distributions of a fund will generally be taxable to
shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in cash
or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time a fund held its investments,
not how long you held your shares. Dividends and distributions of short-tem
capital gains (capital gains relating to securities held for twelve months or
less) are generally taxable at the same rate as ordinary income.
Distributions of long-term capital gains (capital gains relating to securities
held for more than twelve months) are generally taxable as long-term capital
gains. Once a year UAM Funds will send you a statement showing the types and
total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided.
22
<PAGE>
A fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S. corporations
may be eligible for the corporate dividends-received deduction, subject to
certain holding period requirements and financing limitations.
If a fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received from
sources in foreign countries. A fund may elect to treat some of those taxes
as a distribution to shareholders, which would allow shareholders to offset
some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in a
fund, you may recognize a capital gain or loss for federal tax purposes. This
gain or loss will be based on the difference between the cost of your shares
(tax basis) and the amount you receive for them. To aid in computing your tax
basis, you should keep your account statements for the periods during which
you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you realize
on shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain distributions you received on
the shares.
Backup Withholding By law, a fund must withhold 31% of your distributions and
redemption proceeds if you fail (i) to provide complete, correct taxpayer
information, (ii) to properly include on your return payments of taxable
interest or dividends, or (iii) to certify to the fund that you are not
subject to back-up withholding when required to do so or that you are an
"exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of distributions
that are attributable to interest on federal securities. As mentioned above,
you should always consult your tax advisor for specific guidance regarding the
tax effect of your investment in a fund.
23
<PAGE>
Additional Information about the Funds
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, each fund may use the
investment strategies described below. Each fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of a fund's investment practices and its risks, you should read the SAI.
Derivatives
A fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify a fund's gains or losses. There are various factors that
affect a fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives a fund
buys or sells. A fund could be negatively affected if the change in market
value of its securities fails to correlate perfectly with the values of the
derivatives it purchased or sold.
Foreign Securities
A fund may invest in securities of companies located outside of the United
States, American Depositary Receipts, European Depositary Receipts and other
similar global instruments. When a fund invests in foreign securities, it will
be subject to risks not typically associated with domestic securities.
Foreign investments, especially those of companies in emerging markets, can be
riskier and more volatile than investments in the United States. Adverse
political and economic developments or changes in the value of foreign
currency can make it harder for a fund to sell its securities and could reduce
the value of your shares. Differences in tax and accounting standards and
difficulties in obtaining information about foreign companies can negatively
affect investment decisions. Unlike more established markets, emerging markets
may have governments that are less stable, markets that are less liquid and
economies that are less developed.
24
<PAGE>
Short-Term Investing
At times, the adviser may decide to invest up to 100% of a fund's assets in a
variety of high-quality, short-term debt securities, such as U.S. government
securities. The adviser may invest in these types of securities for temporary
defensive purposes, to earn a return on uninvested assets or to meet
redemptions. The adviser may temporarily adopt a defensive position to reduce
changes in the value of the shares of a fund that may result from adverse
market, economic, political or other developments. When the adviser pursues a
temporary defensive strategy, a fund may not profit from favorable
developments that it would have otherwise profited from if it were pursuing
its normal strategies. Likewise, these strategies may prevent a fund from
achieving its stated objectives.
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
Cooke & Bieler, Inc., a Pennsylvania corporation located at 1700 Market
Street, Philadelphia, PA 19103, is each fund's investment adviser. The adviser
manages and supervises the investment of each fund's assets on a discretionary
basis. The adviser 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 has voluntarily agreed to limit the total expenses of one or more
of the funds to the amounts listed in the table below. To maintain these
expense limits, the adviser may waive a portion of its management fee and/or
reimburse certain expenses of the funds. The adviser intends to continue its
expense limitation until further notice, but may discontinue it at any time.
Set forth in the table below are percentages of average net assets each fund
paid in advisory fees to the adviser during the their most recent fiscal year.
This table also lists the amounts funds have agreed to pay to the adviser.
<TABLE>
<CAPTION>
Advisory Fees Paid
for During Most
Fund Name Recent Fiscal Year Expense Limit
---------------------------------------------------------------------------
<S> <C> <C>
C&B Equity Portfolio N/A
---------------------------------------------------------------------------
C&B Equity Portfolio for Taxable
Investors 1.00%
---------------------------------------------------------------------------
C&B Mid Cap Equity Portfolio 1.00%
---------------------------------------------------------------------------
C&B Balanced Portfolio 1.00%
</TABLE>
Portfolio Managers
A team of the adviser's investment professionals has primary responsibility
for the day-to-day management of each fund.
25
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial representatives
may receive compensation from a fund or its service providers for providing a
variety of services. This section briefly describes how the financial
representatives may get paid.
For providing certain services to their clients, financial representatives may
be paid a fee based on the assets of a fund that are attributable to the
financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with a fund.
In addition, your financial representatives may charge you other account fees
for buying or redeeming shares of a fund or for servicing your account. Your
financial representative should provide you with a schedule of its fees and
services.
A fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure that
the fees paid are appropriate for the services performed. A fund does not pay
these service fees on shares purchased directly. In addition, the adviser and
its affiliates may, at their own expense, pay financial representatives for
these services.
UAM Fund Distributors, Inc., the funds' principal underwriter, may participate
in arrangements with selling dealers where the selling dealer waives its right
to distribution or shareholder servicing fees for selling fund shares or
servicing shareholder accounts. These arrangements typically are intended to
avoid duplicate payment of fees where the selling dealers transactions are
through an omnibus account with a different clearing broker, and that broker
is entitled to receive distribution and/or servicing fees from the funds.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with respect
to a fund. The adviser may also pay its affiliated companies for distribution
and marketing services performed with respect to a fund.
26
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of each fund for the past five years. Certain
information contained in the table reflects the financial results for a single
share. The total returns in the table represent the rate that an investor
would have earned on an investment in each fund assuming all dividends and
distributions were reinvested. PricewaterhouseCoopers LLP has audited this
information. The financial statements and the unqualified opinion of
PricewaterhouseCoopers LLP are included in the annual report of the funds,
which is available upon request by calling the UAM Funds at 1-877-826-5465.
C&B EQUITY PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of $ 13.58 $ 16.71 $ 17.89 $ 15.68
Period
Income from Investment 0.16 0.18 0.25 0.36
Operations:
Net Investment Income
Net Realized and Unrealized 0.72 0.76 3.82 2.94
Gain (Loss)
Total From Investment Operations 0.88 0.94 4.07 3.30
Distributions:
Net Investment Income (0.16) (0.19) (0.26) (0.35)
Net Realized Gain (2.24) (3.88) (4.99) (0.74)
Total Distributions (2.40) (4.07) (5.25) (1.09)
Net Asset Value, End of Period $ 12.06 $ 13.58 $ 16.71 $ 17.89
Total Return+ 7.73% 6.56% 30.43% 21.99%
Ratios and Supplemental Data $73,292 $159,256 $149,848 $169,044
Net Assets, End of Period
(Thousands)
Ratio of Expenses to Average 0.89% 0.83% 0.83% 0.81%
Net Assets
Ratio of Net Investment Income 1.12% 1.26% 1.47% 1.92%
to Average Net Assets
Portfolio Turnover Rate 43% 43% 55% 29%
</TABLE>
+ Total return would have been lower had certain fees not been waived and
expenses assumed by the Advisor during the periods indicated
27
<PAGE>
<TABLE>
<CAPTION>
C&B EQUITY PORTFOLIO FOR TAXABLE INVESTORS
-------------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997#
==================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of $12.23 $ 11.45 $ 10.00
Period
Income from Investment 0.12 0.14 0.11
Operations:
Net Investment Income
Net Realized and Unrealized 0.64 0.79++ 1.44
Gain (Loss)
Total From Investment Operations 0.76 0.93 1.55
Distributions:
Net Investment Income (0.12) (0.15) (0.10)
Net Asset Value, End of Period $12.87 $ 12.23 $ 11.45
Total Return++ 6.23% 8.16% $ 15.54%@
Ratios and Supplemental Data $3,634 $ 3,492 $ 993
Net Assets, End of Period
(Thousands)
Ratio of Expenses to Average 1.00% 1.01% 1.00%*
Net Assets
Ratio of Net Investment Income 0.96% 1.24% 1.57%*
to Average Net Assets
Portfolio Turnover Rate 20% 49% 3%
</TABLE>
* Annualized
@ Not annualized
# For the period from February 12, 1997 (commencement of operations) to
October 31, 1997.
++ Total Return would have been lower had certain fees waived and expenses
assumed by the Adviser during the periods indicated.
+++ The amount shown for the year ended October 31, 1998 for a share
outstanding throughout the year does not agree with the amount of aggregate
net losses on investments for the year because of the timing of sales and
repurchases of the Portfolio shares in relation to fluctuating market value
of the investments in the Portfolio.
<TABLE>
<CAPTION>
C&B MID CAP EQUITY PORTFOLIO
-------------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998++++
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of $ 9.69 $ 10.00
Period
Income from Investment 0.06 0.05
Operations:
Net Investment Income
Net Realized and Unrealized 0.15 (0.32)
Gain (Loss)
Total From Investment Operations 0.21 (0.27)
Distributions:
Net Investment Income (0.06) (0.04)
Net Asset Value, End of Period $ 9.84 $ 9.69
Total Return++ 2.19% (2.71)%@
Ratios and Supplemental Data $1,446 $ 1,033
Net Assets, End of Period
(Thousands)
Ratio of Expenses to Average 1.00% 1.01%*
Net Assets
Ratio of Net Investment Income 0.70% 0.86%*
to Average Net Assets
Portfolio Turnover Rate 81% 37%
</TABLE>
* Annualized
@ Not annualized
++++ For the period from February 18, 1998 (commencement of operations) to
October 31, 1998.
++ Total return would have been lower had certain fees waived and certain
expenses not been assumed by the adviser during the periods indicated.
28
<PAGE>
C&B BALANCED PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of $ 12.84 $ 13.75 $ 12.94 $ 13.13
Period
Income from Investment 0.35 0.41 0.42 0.45
Operations:
Net Investment Income
Net Realized and Unrealized --+ 0.66 1.98 1.29
Gain (Loss)
Total From Investment Operations 0.35 1.07 2.40 1.74
Distributions:
Net Investment Income (0.34) (0.41) (0.44) (0.45)
Net Realized Gain (1.93) (1.57) (1.15) (1.48)
Total Distributions (2.27) (1.98) (1.59) (1.93)
Net Asset Value, End of Period $ 10.92 $ 12.84 $ 13.75 $ 12.94
Total Return++ 3.10% 8.56% 20.39% 14.70%
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $14,075 $20,313 $24,066 $22,629
Ratio of Expenses to Average 1.00% 1.00% 1.00% 1.00%
Net Assets
Ratio of Net Investment Income 2.88% 2.97% 3.20% 3.51%
to Average Net Assets
Portfolio Turnover Rate 28% 24% 35% 21%
</TABLE>
* Annualized
@ Not Annualized
++++ For the period from February 18, 1998 (commencement of operations) to
October 31, 1998.
++ Total return would have been lower had certain fees waived and expenses
assumed by the Advisor during the periods indicated.
+ The amount shown for a share outstanding throughout the period does not
accord with the aggregate net gains on investments for that period because
of the timing of sales aand repurchases of the portfolio shares in relation
to fluctuating market value of the investments in the poertfolio.
29
<PAGE>
C&B Portfolios
Investors who want more information about a fund should read the fund's
annual/semi-annual reports and the funds' statement of additional information.
The annual/semi-annual reports of a fund provide additional information about
its investments. In the annual report, you will also find a discussion of the
market conditions and investment strategies that significantly affected the
performance of each fund during the last fiscal year. The statement of
additional information contains additional detailed information about the
funds' and is incorporated by reference into (legally part of) this
prospectus.
Investors can receive free copies of the statement of additional information,
shareholder reports and other information about the UAM Funds and can make
shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about a fund (including the statement of
additional information) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get information on the operation of
the Public Reference Room by calling the Securities and Exchange Commission at
1-202-942-8090. Reports and other information about a fund are available on
the EDGAR Database on the Securities and Exchange Commission's Internet site
at http://www.sec.gov. You may obtain copies of this information, after paying
------------------
a duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the Securities and Exchange Commission's
------------------
Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
[LOGO](R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
The DSI Portfolios
Institutional Class Shares Prospectus March 1, 2001
DSI Small Cap Value Portfolio
DSI Limited Maturity Bond Portfolio
DSI Money Market Portfolio
UAM(R)
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
DSI Small Cap Value Portfolio.........................................
What are the Fund's Objectives?......................................
What are the Fund's Principal Investment Strategies?.................
What are the Fund's Principal Risks?.................................
How has the Fund Performed?..........................................
What are the Fund's Fees and Expenses?...............................
DSI Limited Maturity Bond Portfolio...................................
What are the Fund's Objectives?......................................
What are the Fund's Principal Investment Strategies?.................
What are the Fund's Principal Risks?.................................
How has the Fund Performed?..........................................
What are the Fund's Fees and Expenses?...............................
DSI Money Market Portfolio............................................
</TABLE>
<PAGE>
What are the Fund's Objectives?......................................
What are the Fund's Principal Investment Strategies?.................
What are the Fund's Principal Risks?.................................
How has the Fund Performed?..........................................
What are the Fund's Fees and Expenses?...............................
Investing with the UAM Funds.......................................... 20
Buying Shares........................................................ 20
Redeeming Shares..................................................... 21
Exchanging Shares.................................................... 23
Transaction Policies................................................. 23
Account Policies..................................................... 25
Additional Information about the Funds................................
Other Investment Practices and Strategies............................
Investment Management................................................
Shareholder Servicing Arrangements...................................
Financial Highlights..................................................
DSI Small Cap Value Portfolio........................................
DSI Limited Maturity Bond Portfolio..................................
DSI Money Market Portfolio...........................................
DSI Small Cap Value Portfolio........................................
<PAGE>
DSI Small Cap Value Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Small Cap Value Portfolio seeks maximum capital appreciation consistent
with reasonable risk to principal by investing in primarily smaller
capitalized companies. [The Fund may change its investment objective without
shareholder approval]
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
Normally, the Small Cap Value Portfolio seeks to achieve its goal by investing
at least 65% of its assets in equity securities of companies whose market
capitalization falls within the range of the Russell 2000 Index. The adviser
selects securities for the fund using a bottom-up selection process that
focuses on stocks of statistically undervalued yet sound companies that it
believes are likely to show improving fundamental prospects with an
identifiable catalyst for change. Examples of some of the catalysts the
adviser may consider include:
. Improving fundamentals;
. A new product;
. New management; industry or company restructuring; a strategic acquisition;
and
. Regulatory changes.
The adviser attempts to identify undervalued securities using quantitative
screening parameters such as:
. Relative price/ earnings ratio;
. Relative dividend yield;
. Relative price to book ratio;
. "Earnings per share" revisions, which measure the change in earnings
estimate expectations;
. Debt-adjusted price to sales; and
. Other financial ratios.
The adviser additionally narrows the list of stocks using fundamental security
analysis, which may include on-site visits, outside research and analytical
judgment.
The fund may sell a stock for the following reasons:
. It reaches the target price set by the adviser;
<PAGE>
. The adviser decides the stock is statistically overvalued using the same
quantitative screens it analyzed in the selection process; or
. The earnings expectations or fundamental outlook for the company have
deteriorated.
As market timing is not an important part of the adviser's investment
strategy, cash reserves will normally represent a small portion of the fund's
assets (under 20%).
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also the possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or because
the adviser did not implement its strategy properly. The fund's shares are not
bank deposits and are not guaranteed, endorsed or insured by any financial
institution, government authority or the FDIC. You may lose money by investing
in the fund.
As with all equity funds, the risks that could affect the value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. Equity securities
represent an ownership interest, or the right to acquire an ownership
interest, in an issuer. Different types of equity securities provide different
voting and dividend rights and priority in case of the bankruptcy of the
issuer. Equity securities include common stocks, preferred stocks, convertible
securities, rights and warrants.
Equity securities may lose value because of factors affecting the securities
markets generally, such as adverse changes in economic conditions, the general
outlook for corporate earnings, interest rates or investor sentiment. These
circumstances may lead to long periods of poor performance, such as during a
"bear market." Equity securities may also lose value because of factors
affecting an entire industry or sector, such as increases in production costs,
or factors directly related to a specific company, such as decisions made by
its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have narrower
product lines and more limited financial resources. Their stocks may trade
less frequently and in limited volume.
Value oriented mutual funds may not perform as well as certain other types of
equity mutual funds during periods when value stocks are out of favor.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares the class's average annual
returns to those of a broad-based securities market index. Returns are based
on past results and are not an indication of future performance.
Calendar Year Returns
<TABLE>
<S> <C>
1999 4.59%
2000 [ ]
</TABLE>
Return Quarter Ended
--------------------------------------------------------------------------------
Highest Quarter %
--------------------------------------------------------------------------------
Lowest Quarter %
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 12/15/98*
--------------------------------------------------------------------------
Small Cap Value Portfolio % %
--------------------------------------------------------------------------
S&P Small Cap 600 Index % %
--------------------------------------------------------------------------
Russell 2000 Index % %
* Beginning of operations. Index comparisons begin on 11/30/98.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell their shares, to reinvest dividends or to exchange into other UAM
Funds.
<PAGE>
Annual Portfolio Operating Expenses (expenses that are deducted from fund
assets)
The fund does have annual operating expenses and as a shareholder you pay them
indirectly. This table describes the fees and expenses that you may pay if you
buy and hold shares of the fund.
Small Cap Value Portfolio
--------------------------------------------------------------------------------
Management Fee 0.85%*
--------------------------------------------------------------------------------
Other Expenses [ ]%
--------------------------------------------------------------------------------
Total Annual Fund Operating Expenses# [ ]%*
* The "Management Fees" and "Total Annual Fund Operating Expenses" stated in
the table above may be higher than the expenses you would have actually paid
during the fund's most recent fiscal year. This is due to a voluntary
agreement by the adviser to reduce the management fee of the fund to 0.75%.
The adviser may change or cancel its management fee reduction at any time.
# "Other Expenses" presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund. This is due to
the fact that "Other Expenses" do not take into account any expense offset
arrangement the fund may have that would reduce its custodian fee based on
the amount of cash the fund maintains with its custodian. Such an
arrangement would have the effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above (which do
not reflect any expense limitations) throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 years
--------------------------------------------------------------------------------
Small Cap Value Portfolio $ $ $ $
<PAGE>
DSI Limited Maturity Bond Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Limited Maturity Bond Portfolio seeks maximum total return consistent with
reasonable risk to principal by investing in investment-grade debt securities.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Limited Maturity Bond Portfolio usually seeks to achieve its goal by
investing primarily in investment-grade debt securities. The fund will only
invest in municipal bonds when it expects the return to be greater than or
equal to a taxable investment. The fund normally invests at least 80% of its
assets in debt securities. Although the adviser intends to invest the assets
of the fund in the investment-grade debt securities, it may also invest up to
10% of the assets of the fund in below investment-grade debt securities,
preferred stocks and convertible securities. In the case of convertible
securities, the fund may exercise the conversion privilege, but will sell the
common stocks it receives.
The adviser expects to manage the fund actively and add value by selecting
debt securities in sectors that its analytical tools identify as undervalued,
compared to the market, and meet its criteria in terms of cash flow, credit
prospects and market liquidity. The adviser may sell securities in the fund
using the same tools to identify significantly overvalued securities in
sectors due to changes in market conditions or changes specific to an
individual security. In general, the adviser does not rely on interest rate
forecasts as a tool to indicate purchase or sale of securities.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also the possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or because
the adviser did not implement its strategy properly. The fund's shares are not
bank deposits and are not guaranteed, endorsed or insured by any financial
institution, government authority or the FDIC. You may lose money by investing
in the fund.
A debt security is an interest bearing security that corporations and
governments use to borrow money from investors. The issuer of a debt security
promises to pay interest at a stated rate, which may be variable or fixed, and
to repay the amount borrowed at maturity (dates when debt securities are due
and payable). The fund may invest in a variety of types of debt securities,
including those issued by corporations and the U.S. government and its
agencies, mortgage-backed and asset-backed securities (securities that are
backed by pools of loans or mortgages assembled for sale to investors),
municipal notes and bonds, commercial paper and certificates of deposit.
The concept of duration is useful in assessing the sensitivity of a fixed-
income fund to interest rate movements, which are the main source of risk for
most fixed-income funds. Duration measures price volatility by estimating the
change in price of a debt security for a 1% change in its yield. For example,
a duration of five years means the price of a debt security will change about
5% for every 1% change in its yield. Thus, the higher the duration, the more
volatile the security.
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the price of the bond will go
down, and vice versa). Some types of debt securities are more affected by
changes in interest rates than others. For example, changes in rates may
cause people to pay off or refinance the loans underlying mortgage-backed and
asset-backed securities earlier or later than expected, which would shorten or
lengthen the maturity of the security. This behavior can negatively affect
the performance of a fund by shortening or lengthening its average maturity
and, thus, changing its effective duration. The unexpected timing of
mortgage-backed and asset-backed prepayments caused by changes in interest
rates may also cause the fund to reinvest its assets at lower rates, reducing
the yield of the fund.
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 risk that the issuer will fail to pay interest fully and return
principal in a timely manner. If an issuer defaults or becomes unable to honor
its financial obligations, the security 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.
A with all equity funds, the risks that could affect the value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors affecting the securities markets generally and an entire industry
or
<PAGE>
sector or a particular company. This risk is greater for small and medium
sized companies, which tend to be more vulnerable to adverse developments than
larger companies.
Value oriented mutual funds may not perform as well as certain other types of
equity mutual funds during periods when value stocks are out of favor.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares the class's average annual
returns to those of a broad-based securities market index. Returns are based
on past results and are not an indication of future performance.
Calendar Year Returns
1991 14.84%
1992 7.35%
1993 3.73%
1994 -1.19%
1995 10.97%
1996 5.03%
1997 6.70%
1998 5.38%
1999 -0.11%
<TABLE>
<CAPTION>
Return Quarter Ended
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Highest Quarter %
--------------------------------------------------------------------------------------------------------
Lowest Quarter %
</TABLE>
Average Annual Returns For Periods Ended December 31, 2000
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Maturity Bond Portfolio -% % %
Merrill Lynch 1-4.99 Year Corporate/Government Bond Index % % %
Lipper Short Intermediate Investment Grade Debt Funds % % %
Average
</TABLE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell their shares, to reinvest dividends or to exchange into other UAM
Funds.
<PAGE>
Annual Portfolio Operating Expenses (expenses that are deducted from fund
assets)
The fund does have annual operating expenses and as a shareholder you pay them
indirectly. This table describes the fees and expenses that you may pay if you
buy and hold shares of a fund.
<TABLE>
<CAPTION>
Limited Maturity Bond Portfolio
---------------------------------------------------------------------------------------------
<S> <C>
Management Fee 0.45%
---------------------------------------------------------------------------------------------
Other Expenses [ ]%
---------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses# [ ]%
</TABLE>
# "Other Expenses" presented in the table above may be higher than the
expnses you would actually pay as a shareholder in the fund. This is due to
the fact that "Other Expenses" do not take into account any expense offset
arrangement the fund may have that would reduce its custodian fee based on
the amount of cash the portfolio maintains with its custodian. Such an
arrangement would have the effect of reducing the fund's expenses.
<PAGE>
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above (which do
not reflect any expense limitations) throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Limited Maturity Bond Portfolio $ $ $ $
</TABLE>
<PAGE>
DSI Money Market Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
-------------------------------------------------------------------------------
The Money Market Portfolio seeks maximum current income consistent with the
preservation of capital and liquidity by investing in short-term investment-
grade money market obligations issued or guaranteed by financial institutions,
nonfinancial corporations, and the U.S. government, as well as repurchase
agreements collateralized by such securities.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
-------------------------------------------------------------------------------
The Money Market Portfolio invests in securities that (1) the adviser has
determined present minimal credit risks and (2) are eligible securities under
Rule 2a-7 of the Investment Company Act of 1940 at the time of acquisition.
The fund will also comply with the diversification requirements of Rule 2a-7.
Consequently, the fund presently invests in instruments that mature within 397
days and maintain an average weighted maturity of 90 days or less. The fund
will invest in U.S. dollar-denominated certificates of deposit, and bankers'
acceptances, commercial paper (including variable amount master demand notes),
short-term corporate obligations, U.S. government securities, and repurchase
agreements.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
-------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also the possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or because
the adviser did not implement its strategy properly. The fund's shares are not
bank deposits and are not guaranteed, endorsed or insured by any financial
institution, government authority or the FDIC. You may lose money by investing
in the fund.
A debt security is an interest bearing security that corporations and
governments use to borrow money from investors. The issuer of a debt security
promises to pay interest at a stated rate, which may be variable or fixed, and
to repay the amount borrowed at maturity (dates when debt securities are due
and payable). The fund may invest in a variety of types of debt securities,
including those issued by corporations and the U.S. government and its
agencies, mortgage-backed and asset-backed securities (securities that are
backed by pools of loans or mortgages assembled for sale to investors),
municipal notes and bonds, commercial paper and certificates of deposit.
The concept of duration is useful in assessing the sensitivity of a fixed-
income fund to interest rate movements, which are the main source of risk for
most fixed-income funds. Duration measures price volatility by estimating the
change in price of a debt security for a 1% change in its yield. For example,
a duration of five years means the price of a debt security will change about
5% for every 1% change in its yield. Thus, the higher the duration, the more
volatile the security.
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the price of the bond will go
down, and vice versa). Some types of debt securities are more affected by
changes in interest rates than others. For example, changes in rates may
cause people to pay off or refinance the loans underlying mortgage-backed and
asset-backed securities earlier or later than expected, which would shorten or
lengthen the maturity of the security. This behavior can negatively affect
the performance of a fund by shortening or lengthening its average maturity
and, thus, changing its effective duration. The unexpected timing of
mortgage-backed and asset-backed prepayments caused by changes in interest
rates may also cause the fund to reinvest its assets at lower rates, reducing
the yield of the fund.
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 risk that the issuer will fail to pay interest fully and return
principal in a timely manner. If an issuer defaults or becomes unable to honor
its financial obligations, the security 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.
Value oriented mutual funds may not perform as well as certain other types of
equity mutual funds during periods when value stocks are out of favor.
<PAGE>
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares the class's average annual
returns to those of a broad-based securities market index. Returns are based
on past results and are not an indication of future performance.
Calendar Year Returns
----------------------------------------------------------------------------
1990 7.81%
1991 5.65%
1992 3.33%
1993 2.62%
1994 3.68%
1995 5.61%
1996 5.18%
1997 5.30%
1998 5.30%
1999 4.85%
2000 [ ]%
<TABLE>
<CAPTION>
Return Quarter Ended
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Highest Quarter %
----------------------------------------------------------------------------------------------------------
Lowest Quarter %
</TABLE>
For the current 7-day yield of the Money Market Portfolio please call (toll
free (1-877-826-5465)
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell their shares, to reinvest dividends or to exchange into other UAM
Funds.
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets)
The fund does have annual operating expenses and as a shareholder you pay them
indirectly. This table describes the fees and expenses that you may pay if you
buy and hold shares of a portfolio.
<TABLE>
<CAPTION>
Money Market Portfolio
-------------------------------------------------------------------------------------------
<S> <C>
Management Fee 0.40%*
-------------------------------------------------------------------------------------------
Other Expenses 0.28%
-------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses# 0.68%*
</TABLE>
* The "Management Fees" and "Total Annual Fund Operating Expenses" stated in
the table above may be higher than the expenses you would have actually
paid during the fund's most recent fiscal year. This is due to a voluntary
agreement by the adviser to reduce the
<PAGE>
management fee of fund to 0.18%. The adviser may change or cancel its
management fee reduction at any time.
# "Other Expenses" presented in the table above may be higher than the
expnses you would actually pay as a shareholder in the fund. This is due to
the fact that "Other Expenses" do not take into account any expense offset
arrangement the fund may have that would reduce its custodian fee based on
the amount of cash the fund maintains with its custodian. Such an
arrangement would have the effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above (which do
not reflect any expense limitations) throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Portfolio $ $ $ $
</TABLE>
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with a fund by sending a check or money order and your
account application to the UAM Funds. You should make your check or money
order payable to the "UAM Funds." The UAM Funds do not accept third-party
checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the UAM
Funds. Be sure your check identifies clearly your name, your account number
and a fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to the
UAM Funds. Finally, wire your money using the wiring instructions set forth
below. To add to an existing account by wire, call 1-877-826-5465 to get a
wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to cancel
or change it.
Minimum Investments
You can open an account with either fund with a minimum initial investment of
$2,500 ($500 for individual retirement accounts (IRAs) and $250 for Spousal
IRAs). You can buy additional shares for as little as $100.
Fund Codes
Each fund's reference information, which is listed below, will be helpful to
you when you contact the UAM Funds to purchase or exchange shares, check daily
net asset value per share (NAV) or get additional information.
<TABLE>
<CAPTION>
Fund Name Trading Symbol CUSIP Fund Code
===============================================================================
<S> <C> <C> <C>
DSI Small Cap Value Portfolio DSISX 902555275 783
-------------------------------------------------------------------------------
DSI Limited Maturity Bond
Portfolio DSILX 902555861 643
-------------------------------------------------------------------------------
DSI Money Market Portfolio DSMXX 902555853 644
</TABLE>
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting management
and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity in
which they are registered must sign the letter.
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you need
more information.
<PAGE>
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To participate
in this service and to receive your redemptions by wire, you must complete the
appropriate sections of the account application and mail it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login information,
-----------
including your personal identification number (PIN), please call 1-877-826-
5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial institution.
To participate in this service, you must complete the appropriate sections of
the account application and mail it to the UAM Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your bank
by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in proper
form.
The UAM Funds may require that a bank or member firm of a national securities
exchange guarantee signatures. A notary public cannot guarantee a signature.
Signature guarantees are for the protection of shareholders. Before they grant
a redemption request, the UAM Funds may require a shareholder to furnish
additional legal documents to insure proper authorization.
If you redeem shares that were purchased by check, you will not receive your
redemption proceeds until the check has cleared, which may take up to 15 days
from the purchase date. You may avoid these delays by paying for shares with
a certified check, bank check or money order.
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may suspend
your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the same
class of any other UAM Fund by writing to or calling the UAM Funds. You can
also exchange shares of the UAM Funds on the Internet at www.uam.com. For
-----------
login information, including your personal identification number (PIN), please
call 1-877-826-5465. Before exchanging your shares, please read the
prospectus of the UAM Fund for which you want to exchange. You may obtain any
UAM Fund prospectus by calling 1-877-826-5465. You may only exchange shares
between accounts with identical registrations (i.e., the same names and
addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept your
order before the close of trading on the New York Stock Exchange that day.
Otherwise, you will receive the NAV that is calculated at the close of trading
on the following business day.
Since securities that are traded on foreign exchanges may trade on days when
the New York Stock Exchange is closed, the value of a UAM Fund may change on
days when you are unable to purchase or redeem shares.
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their assets,
subtracting their liabilities and then dividing the result by the number of
shares outstanding. The UAM Funds use current market prices to value their
investments. However, the UAM Funds may value investments at fair value when
market prices are not readily available or when events occur that make
established valuation methods (such as stock exchange closing prices)
unreliable. The UAM Funds will determine an investment's fair value according
to methods established by the Board. The UAM Funds value debt securities that
are purchased with remaining maturities of 60 days or less at amortized cost,
which approximates market value. The UAM Funds may use a pricing service to
value some of their assets, such as debt securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial intermediary
(such as a financial planner or adviser). Generally, to buy or sell shares at
the NAV of any given day your financial intermediary must receive your order
before the close of trading on the New York Stock Exchange that day. Your
financial intermediary is responsible for transmitting all purchase and
redemption requests, investment information, documentation and money to the
UAM Funds on time. Your financial intermediary may charge additional
transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that allow
them to enter confirmed purchase or redemption orders on behalf of clients and
customers. Under this arrangement, the financial intermediary must send your
payment to the UAM Funds by the time they price their shares on the following
business day. If your financial intermediary fails to do so, it may be
responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities instead
of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The UAM Funds will not be responsible
for any loss, liability, cost or expense for following instructions received
by telephone reasonably believed to be genuine.
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value of
your account falls below 50% of the required minimum initial investment. This
provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations and not
your redemptions.
The UAM Funds will notify you before liquidating your account and allow you 60
days to increase the value of your account.
Distributions
Normally, each fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of a fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of investing
in a fund. This summary does not apply to shares held in an individual
retirement account or other tax-qualified plan, which are not subject to
current tax. Transactions relating to shares held in such accounts may,
however, be taxable at some time in the future. You should always consult your
tax advisor for specific guidance regarding the tax effect of your investment
in the UAM Funds.
Taxes on Distributions Distributions of a fund will generally be taxable to
shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in cash
or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time a fund held its investments,
not how long you held your shares. Dividends and distributions of short-tem
capital gains (capital gains relating to securities held for twelve months or
less) are generally taxable at the same rate as ordinary income.
Distributions of long-term capital gains (capital gains relating to securities
held for more than twelve months) are generally taxable as long-term capital
gains. Once a year UAM Funds will send you a statement showing the types and
total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided.
<PAGE>
A fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S. corporations
may be eligible for the corporate dividends-received deduction, subject to
certain holding period requirements and financing limitations.
If a fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received from
sources in foreign countries. A fund may elect to treat some of those taxes
as a distribution to shareholders, which would allow shareholders to offset
some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in a
fund, you may recognize a capital gain or loss for federal tax purposes. This
gain or loss will be based on the difference between the cost of your shares
(tax basis) and the amount you receive for them. To aid in computing your tax
basis, you should keep your account statements for the periods during which
you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you realize
on shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain distributions you received on
the shares.
Backup Withholding By law, a fund must withhold 31% of your distributions and
redemption proceeds if you fail (i) to provide complete, correct taxpayer
information, (ii) to properly include on your return payments of taxable
interest or dividends, or (iii) to certify to the fund that you are not
subject to back-up withholding when required to do so or that you are an
"exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of distributions
that are attributable to interest on federal securities. As mentioned above,
you should always consult your tax advisor for specific guidance regarding the
tax effect of your investment in a fund.
<PAGE>
Additional information about the Funds
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to their principal investment strategies, the portfolios may use
the investment strategies described below. They may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For information concerning these
and other investment practices and their risks, you should read the SAI.
Foreign Securities
The Small Cap Value Portfolio and Limited Maturity Bond Portfolio may invest
in foreign securities. However, the foreign investments of the Small Cap Value
Portfolio are limited to 20% of their total assets. The funds will select
foreign securities according to the same standards they apply to domestic
securities.
Foreign securities, especially those of companies in emerging markets, can be
riskier and more volatile than domestic securities. Adverse political and
economic developments or changes in the value of foreign currency can make it
harder for a portfolio to sell its securities and could reduce the value of
your shares. Changes in tax and accounting standards and difficulties
obtaining information about foreign companies can negatively affect investment
decisions.
Derivatives
Generally, a derivative is a financial transaction whose value is based on the
value of an underlying asset, interest rate, exchange rate, stock index or
other measures. Each fund other than the Money Market Portfolio may invest in
futures and options to protect against a change in the price of an investment
the fund owns or anticipates buying in the future (a practice known as
hedging). The funds also may use futures and options to remain fully invested
and to reduce transaction costs. The Limited Maturity Bond Portfolio may also
use foreign currency exchange contracts.
Futures contracts are contracts that obligate the buyer to receive and the
seller to deliver a security or money on a specified date. Options grant
the right, but not the obligation, to buy or sell a specified amount of a
security or other assets on or before a specified date at a predetermined
price. Foreign currency exchange contracts involve an obligation to purchase
or sell a specific amount of currency at a future date at a specific
price.
<PAGE>
Derivatives are often more volatile than other investments and may magnify a
fund's gains or losses. A fund may lose money if the adviser:
. Fails to predict correctly the direction in which the underlying asset or
economic factor will move.
. Judges market conditions incorrectly.
. Employs a strategy that does not correlate well with the investments of the
portfolio.
Short-Term Investing
At times, the adviser may decide to invest up to 100% of a fund's assets
in a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities for
temporary defensive purposes, to earn a return on uninvested assets or to meet
redemptions. The adviser may temporarily adopt a defensive position to reduce
changes in the value of the shares of a fund that may result from adverse
market, economic, political or other developments.
When the adviser pursues a temporary defensive strategy, a fund may not
profit from favorable developments that it would have otherwise profited from
if it were pursuing its normal strategies. Likewise, these strategies may
prevent a portfolio from achieving its stated objectives.
Portfolio Turnover
A fund may buy and sell investments relatively often. Such a strategy
often involves higher expenses, including brokerage commissions, and may
increase the amount of capital gains (and, in particular, short-term gains)
realized by a fund. Shareholders must pay tax on such capital gains.
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
Dewey Square Investors Corporation, located at One Financial Center, Boston,
Massachusetts 02111, is the investment adviser to the funds. The adviser
manages and supervises the investment of the fund'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.
Set forth in the table below are the management fees the portfolios paid to
the adviser during the their most recent fiscal year, expressed as a
percentage of average net assets. In addition, the adviser has voluntarily
agreed to waive a portion of its management fee for this classof some of the
funds to the amounts listed in the table below. The adviser intends to
continue its fee waiver until further notice, but may discontinue it at any
time.
<PAGE>
<TABLE>
<CAPTION>
Small Cap Limited Money
Value Maturity Bond Market
Portfolio Portfolio Portfolio
------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fee 0.75% 0.45% 0.18%
------------------------------------------------------------------------------
Expense Limit 0.75% N/A 0.18%
</TABLE>
Portfolio Managers
Teams of the adviser's investment professionals have primary responsibility
for the day-to-day management of the portfolios. For more information on the
composition of those teams, including biographies of some of their members,
please see the SAI.
Subsequent Events
The adviser has entered into an agreement with Dwight Asset Management
Company ("Dwight"), also a subsidiary of UAM, whereby the adviser will be
merged into Dwight. A shareholder meeting will be held on December 29, 2000 to
approve a new investment advisory agreement with Dwight on behalf of DSI
Limited Maturity Bond and DSI Money Market Portfolios. Dwight was founded in
1984 by John K. Dwight and joined UAM in 1994. Dwight specializes in the
management of stable value portfolios for defined contribution plans. Should
Dwight be approved as adviser to the DSI Limited Maturity Bond Fund and DSI
Money Market Portfolios such funds shall be renamed Dwight Limited Maturity
Bond Portfolio and Dwight Money Market Portfolio, respectively.
The Board of the Company has approved a new investment advisory agreement on
behalf of DSI Small Cap Value Portfolio with Independence Investment
Associates, Inc. ("Independence"). Independence, with offices at 53 State
Street, Boston, Massachusetts, is a wholly-owned subsidiary of John Hancock
Financial Services, Inc. A shareholder meeting will be held January 31, 2001
to approve a new investment advisory agreement. Should Independence be
approved as adviser to the DSI Small Cap Value such fund shall be renamed
Independence Small Cap Value Fund.
SHAREHOLDER SERVICING ARRANGEMENTS
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial representatives
may receive compensation from the UAM Funds or their service providers for
providing a variety of services. This section briefly describes how the
financial representatives may get paid.
For providing certain services to their clients, financial representatives may
be paid a fee based on the assets of the UAM Funds that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with the UAM
Funds. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of the UAM Funds or for servicing
your account. Your financial representative should provide you with a schedule
of its fees and services.
The UAM Funds may pay all or part of the fees paid to financial
representatives. Periodically, the board of the UAM Funds reviews these
arrangements to ensure that the fees paid are appropriate to the services
performed. The UAM Funds do not pay these service fees on shares purchased
directly. In addition, the adviser and its affiliates may, at their own
expense, pay financial representatives for these services.
UAM Fund Distributors, Inc. the funds' principal underwriter, may participate
in arrangements with selling dealers where the selling dealer waives its right
to distribution or shareholder servicing fees for selling fund shares or
servicing shareholder accounts. These arrangements typically are intended to
avoid duplicate payment of fees where the selling dealers transactions are
through an omnibus account with a different clearing broker, and that broker
is entitled to receive distribution and/or servicing fees from the funds.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with respect
to the UAM Funds.
<PAGE>
The adviser may pay its affiliated companies for distribution and marketing
services performed with respect to the UAM Funds.
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of the portfolios for the fiscal periods indicated.
Certain information contained in the table reflects the financial results for
a single share. The total returns in the table represent the rate that an
investor would have earned on an investment in the portfolios assuming all
dividends and distributions were reinvested. PricewaterhouseCoopers LLP has
audited this information. The financial statements and the unqualified opinion
of PricewaterhouseCoopers LLP are included in the annual report of the
portfolios, which is available upon request by calling the UAM Funds at 1-877-
826-5465.
SMALL CAP VALUE PORTFOLIO
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999#
===============================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $ 10.00
-------------------------------------------------------------------------------
Income from Investment Operations: (0.09)
Net Investment Loss
Net Realized and Unrealized Loss (0.47)
-------------------------------------------------------------------------------
Total From Investment Operations (0.56)
-------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.44
-------------------------------------------------------------------------------
Total Return+ (5.60)%@
-------------------------------------------------------------------------------
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $ 15,893
Ratio of Expenses to Average Net Assets 1.85%*
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.11)%*
Portfolio Turnover Rate 91%
</TABLE>
* Annualized
@ Not annualized
# For the period from December 16, 1998 (commencement of operations) to October
31, 1999.
+ Total return may have been lower had certain expenses not been waived by the
Adviser during the periods indicated.
<PAGE>
LIMITED MATURITY BOND PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.39 $ 9.46 $ 9.40 $ 9.51
-------------------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income 0.56 0.55 0.58 0.62
Net Realized and Unrealized Gain
(Loss) (0.46) (0.08) 0.05 (0.13)
-------------------------------------------------------------------------------------
Total From Investment Operations 0.10 0.47 0.63 0.49
-------------------------------------------------------------------------------------
Distributions:
Net Investment Income (0.55) (0.54) (0.57) (0.60)
-------------------------------------------------------------------------------------
Total Distributions (0.55) (0.54) (0.57) (0.60)
-------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 8.94 $ 9.39 $ 9.46 $ 9.40
-------------------------------------------------------------------------------------
Total Return 1.04% 5.08% 6.93% 5.34%
-------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (Thousands) $20,861 $35,988 $32,712 $30,433
Ratio of Expenses to Average Net Assets 1.03% 0.97% 0.95% 1.00%
Ratio of Net Investment Income to
Average Net Assets 5.58% 5.98% 6.17% 6.55%
Portfolio Turnover Rate 63% 107% 51% 121%
</TABLE>
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Income from Investment
Operations:
Net Investment Income 0.047 0.053 0.051 0.051
Total From Investment
Operations 0.047 0.053 0.051 0.051
-------------------------------------------------------------------------------------
Distributions:
Net Investment Income (0.047) (0.053) (0.051) (0.051)
Total Distributions (0.047) (0.053) (0.051) (0.051)
-------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total Return+ 4.77% 5.38% 5.26% 5.26%
-------------------------------------------------------------------------------------
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $126,380 $150,861 $152,216 $220,124
Ratio of Expenses to Average
Net Assets 0.46% 0.36% 0.37% 0.38%
Ratio of Net Investment
Income (Loss) to Average Net
Assets 4.66% 5.27% 5.14% 5.14%
</TABLE>
+ Total return would have been lower had certain fees not been waived and
certain expenses not been assumed by the adviser during the periods
indicated.
<PAGE>
The DSI Portfolios
For investors who want more information about the portfolios, the following
documents are available upon request.
Annual/Semi-Annual Reports
The annual/semi-annual reports of the portfolios provide additional
information about their investments. In the annual report, you will also find
a discussion of the market conditions and investment strategies that
significantly affected the performance of the portfolios during the last
fiscal year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolios and is
incorporated by reference into (legally part of) this prospectus.
How to Get More Information
Investors can receive free copies of the SAI, shareholder reports and other
information about the UAM Funds and can make shareholder inquiries by writing
to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about the portfolios (including the SAI)
at the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. You can get information on the operation of the Public
Reference Room by calling the Securities and Exchange Commission at 1-202-942-
8090. Reports and other information about the portfolio are available on the
EDGAR Database on the Securities and Exchange Commission's Internet site at
http://www.sec.gov. You may obtain copies of this information, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the Securities and Exchange Commission's
Public Reference Section, Washington, D.C. 20549-0102.
The portfolios' Investment Company Act of 1940 file number is 811-5683
UAM(R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
FMA Small Company Portfolio
Institutional Class Shares Prospectus March 1, 2001
[LOGO OF UMA](R)
The Securities and Exchange Commission has not approved or disapproved of
these securities or passed upon the adequate or accuracy of this
prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Fund Summary................................................................ 1
What is the Fund's Objective?............................................ 1
What are the Fund's Principal Investment Strategies?..................... 1
What are the Fund's Principal Risks?..................................... 1
How has the Fund Performed?.............................................. 2
What are the Fund's Fees And Expenses?................................... 3
Investing with the UAM Funds................................................ 4
Buying Shares............................................................ 4
Redeeming Shares......................................................... 5
Exchanging Shares........................................................ 7
Transaction Policies..................................................... 7
Account Policies......................................................... 9
Additional Information about the Fund....................................... 11
Other Investment Practices and Strategies................................ 11
Investment Management.................................................... 12
Shareholder Servicing Arrangements....................................... 12
Additional Classes....................................................... 13
Financial Highlights........................................................ 14
</TABLE>
<PAGE>
Fund Summary
WHAT IS THE FUND'S OBJECTIVE?
--------------------------------------------------------------------------------
The fund seeks maximum, long-term total return, consistent with reasonable
risk to principal, by investing in common stocks of smaller companies in
terms of revenues and/or market capitalization. The fund may change its
investment objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The fund invests primarily in common stocks of domestic companies that are
smaller or less established in terms of revenues, assets and market
capitalization. Under normal circumstances, the fund invests at least 65% of
its assets in companies with small market capitalizations at the time of
initial purchase. The fund considers a company to have a small market
capitalization when its market capitalization is less than $1 billion or when
its market capitalization falls within the market capitalization range of the
Russell 2000 Index. As of December 31, 2000, the Russell 2000 Index had a
weighted average market capitalization of $___ billion. As of the same date
the smallest company in the Russell 2000 had a market capitalization of $___
million and the largest company had a market capitalization of $___ billion.
At any given time, the fund may own a diversified group of stocks in several
industries. The fund invests mainly in common stocks, but it may also invest
in other types of equity securities.
The adviser analyzes and selects investments by looking for market trends and
changes that signal opportunity. The adviser seeks out companies with lower
price to earnings ratios, strong cash flow, good credit lines and clean or
improving balance sheets. To minimize risk and volatility, the adviser uses
initial public offerings sparingly, concentrating instead on companies with
seasoned management or a track record as part of a larger company.
The adviser follows all stocks owned or being considered for purchase. The
adviser re-evaluates and considers selling stocks that:
. Meet initial targets of revenue or stock market value growth; or
. Decline an absolute 25% in stock market value.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could happen
because its strategy failed to produce the intended results or because the
adviser did
1
<PAGE>
not implement its strategy properly. The fund's shares are not bank deposits
and are not guaranteed, endorsed or insured by any financial institution,
government authority or the FDIC. You may lose money by investing in the
fund.
As with all equity funds, the risks that could affect the value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors that affect the securities markets generally, such as adverse changes
in economic conditions, the general outlook for corporate earnings, interest
rates or investor sentiment. Equity securities may also lose value because of
factors affecting an entire industry or sector, such as increases in
production costs, or factors directly related to a specific company, such as
decisions made by its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have narrower
product lines and more limited financial resources. Their stocks may trade
less frequently and in limited volume.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in this
class of the fund. The bar chart shows how performance of this class of the
fund has varied from year to year. The average annual return table compares
the average annual returns of this class of the fund to those of a broad-
based securities market index. Returns are based on past results and are not
an indication of future performance.
Calendar Year Returns
1992 1993 1994 1995 1996 1997 1998 1999 2000
5.51% 28.52% -2.89% 24.16% 26.20% 40.39% -2.03% -8.82%
During the periods shown in the chart for the fund, the highest return for a
quarter was __.__% (quarter ending __/__/__) and the lowest return for a
quarter was __.__% (quarter ending __/__/__).
2
<PAGE>
Average Annual Returns For Periods Ended December 31,2000
1 Year Since 8/1/91*
-----------------------------------------------------------------------------
FMA Small Company Portfolio
-----------------------------------------------------------------------------
Russell 2000 Index
-----------------------------------------------------------------------------
S&P 500 Index
* Beginning of operations. Index comparisons begin on July 31, 1991.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell its shares, to reinvest dividends or to exchange into other UAM
Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
Management Fees 0.75%
Other Expenses* -.--%
-----------------------------------------------------------------------------
Total Annual Fund Operating Expenses -.--%
* "Other Expenses" presented in the table above may be higher than the expenses
you would actually pay as a shareholder in the fund because the adviser has
voluntarily agreed to limit the expenses of the fund to the extent necessary
to keep its total expenses (excluding interest, taxes, brokerage commissions
and extraordinary expenses) from exceeding 1.27% of its average daily net
assets. The adviser may change or cancel its expense limitation at any time.
In addition, "Other Expenses" do not take into account any expense offset
arrangement the fund may have that would reduce its custodian fee based on the
amount of cash the fund maintains with its custodian. This would also have the
effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your
dividends and distributions and that you paid the total expenses stated above
(which do not reflect any expense limitations) throughout the period of your
investment. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------
3
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with the fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept third-
party checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the
UAM Funds. Be sure your check identifies clearly your name, your account
number and the fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to the
UAM Funds. Finally, wire your money using the wiring instructions set forth
below. To add to an existing account by wire, call 1-877-826-5465 to get a
wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
4
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to cancel
or change it.
Minimum Investments
You can open an account with the fund with a minimum initial investment of
$2,500 ($500 for individual retirement accounts (IRAs) and $250 for Spousal
IRAs). You can buy additional shares for as little as $100.
Fund Codes
The fund's reference information, which is listed below, will be helpful to
you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
Trading Symbol CUSIP Fund Code
-----------------------------------------------------------------------------
FMACX 902555796 645
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting management
and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you need
more information.
5
<PAGE>
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you must
complete the appropriate sections of the account application and mail it to
the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login information,
-----------
including your personal identification number (PIN), please call 1-877-826-
5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial institution.
To participate in this service, you must complete the appropriate sections of
the account application and mail it to the UAM Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your bank
by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in proper
form.
The UAM Funds may require that a bank or member firm of a national securities
exchange guarantee signatures. A notary public cannot guarantee a signature.
Signature guarantees are for the protection of shareholders. Before they
grant a redemption request, the UAM Funds may require a shareholder to
furnish additional legal documents to insure proper authorization.
If you redeem shares that were purchased by check, you will not receive your
redemption proceeds until the check has cleared, which may take up to 15 days
from the purchase date. You may avoid these delays by paying for shares with
a certified check, bank check or money order.
6
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may suspend
your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
At no charge, you may exchange shares of one UAM Fund for shares of the same
class of any other UAM Fund by writing to or calling the UAM Funds. You can
also exchange shares of the UAM Funds on the Internet at www.uam.com. For
-----------
login information, including your personal identification number (PIN),
please call 1-877-826-5465. Before exchanging your shares, please read the
prospectus of the UAM Fund for which you want to exchange. You may obtain any
UAM Fund prospectus by calling 1-877-826-5465. You may only exchange shares
between accounts with identical registrations (i.e., the same names and
addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days when
the New York Stock Exchange is closed, the value of a UAM Fund may change on
days when you are unable to purchase or redeem shares.
7
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their assets,
subtracting their liabilities and then dividing the result by the number of
shares outstanding. The UAM Funds use current market prices to value their
investments. However, the UAM Funds may value investments at fair value when
market prices are not readily available or when events occur that make
established valuation methods (such as stock exchange closing prices)
unreliable. The UAM Funds will determine an investment's fair value according
to methods established by the Board. The UAM Funds value debt securities that
are purchased with remaining maturities of 60 days or less at amortized cost,
which approximates market value. The UAM Funds may use a pricing service to
value some of their assets, such as debt securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial intermediary
(such as a financial planner or adviser). Generally, to buy or sell shares at
the NAV of any given day your financial intermediary must receive your order
before the close of trading on the New York Stock Exchange that day. Your
financial intermediary is responsible for transmitting all purchase and
redemption requests, investment information, documentation and money to the
UAM Funds on time. Your financial intermediary may charge additional
transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do so,
it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities instead
of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The UAM Funds will not be responsible
for any loss, liability, cost or expense for following instructions received
by telephone reasonably believed to be genuine.
8
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value of
your account falls below 50% of the required minimum initial investment. This
provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations and
not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, the fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of the fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in the fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such accounts
may, however, be taxable at some time in the future. You should always
consult your tax advisor for specific guidance regarding the tax effect of
your investment in the UAM Funds.
Taxes on Distributions Distributions of the fund will generally be taxable
to shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in cash
or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time the fund held its
investments, not how long you held your shares. Dividends and distributions
of short-term capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as long-
term capital gains. Once a year UAM Funds will send you a statement showing
the types and total amount of distributions you received during the previous
year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided.
9
<PAGE>
The fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received deduction,
subject to certain holding period requirements and financing limitations.
If the fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the fund received
from sources in foreign countries. The fund may elect to treat some of those
taxes as a distribution to shareholders, which would allow shareholders to
offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in the
fund, you may recognize a capital gain or loss for federal tax purposes. This
gain or loss will be based on the difference between the cost of your shares
(tax basis) and the amount you receive for them. To aid in computing your tax
basis, you should keep your account statements for the periods during which
you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you realize
on shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain distributions you received
on the shares.
Backup Withholding By law, the fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct taxpayer
information, (ii) to properly include on your return payments of taxable
interest or dividends, or (iii) to certify to the fund that you are not
subject to back-up withholding when required to do so or that you are an
"exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of distributions
that are attributable to interest on federal securities. As mentioned above,
you should always consult your tax advisor for specific guidance regarding
the tax effect of your investment in the fund.
10
<PAGE>
Additional Information about the Fund
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, the fund may use the
investment strategies described below. The fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of the fund's investment practices and its risks, you should read the
SAI.
Derivatives
The fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify the fund's gains or losses. There are various factors that
affect the fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives the fund
buys or sells. The fund could be negatively affected if the change in market
value of its securities fails to correlate perfectly with the values of the
derivatives it purchased or sold.
Foreign Securities
The fund may invest in securities of companies located outside of the United
States, American Depositary Receipts, European Depositary Receipts and other
similar global instruments. When the fund invests in foreign securities, it
will be subject to risks not typically associated with domestic securities.
Foreign investments, especially those of companies in emerging markets, can
be riskier and more volatile than investments in the United States. Adverse
political and economic developments or changes in the value of foreign
currency can make it harder for the fund to sell its securities and could
reduce the value of your shares. Differences in tax and accounting standards
and difficulties in obtaining information about foreign companies can
negatively affect investment decisions. Unlike more established markets,
emerging markets may have governments that are less stable, markets that are
less liquid and economies that are less developed.
11
<PAGE>
Short-Term Investing
At times, the adviser may decide to invest up to 100% of the fund's assets in
a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities
for temporary defensive purposes, to earn a return on uninvested assets or to
meet redemptions. The adviser may temporarily adopt a defensive position to
reduce changes in the value of the shares of the fund that may result from
adverse market, economic, political or other developments. When the adviser
pursues a temporary defensive strategy, the fund may not profit from
favorable developments that it would have otherwise profited from if it were
pursuing its normal strategies. Likewise, these strategies may prevent the
fund from achieving its stated objectives.
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
Fiduciary Management Associates Inc., an Illinois corporation located at 55
Monroe Street, Suite 2550, Chicago, Illinois 60603, is the fund's investment
adviser. The adviser manages and supervises the investment of the fund's
assets on a discretionary basis. The adviser 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.
During its most recent fiscal year, the fund paid _.__% in management fees to
its adviser, expressed as a percentage of average net assets. In addition,
the adviser has voluntarily agreed to limit the total expenses of the fund to
1.27% of its average net assets. To maintain this expense limit, the adviser
may waive a portion of its management fee and/or reimburse certain expenses
of the fund. The adviser intends to continue its expense limitation until
further notice, but may discontinue it at any time.
Portfolio Managers
A team of the adviser's investment professionals has primary responsibility
for the day-to-day management of the fund. For more information on the
composition of the team managing the fund, please see the SAI.
SHAREHOLDER SERVICING ARRANGEMENTS
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial representatives
may receive compensation from the fund or its service providers for providing
a variety of services. This section briefly describes how the financial
representatives may get paid.
12
<PAGE>
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of the fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with the
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of the fund or for servicing your
account. Your financial representative should provide you with a schedule of
its fees and services.
The fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure that
the fees paid are appropriate for the services performed. The fund does not
pay these service fees on shares purchased directly. In addition, the adviser
and its affiliates may, at their own expense, pay financial representatives
for these services.
UAM Fund Distributors, Inc., the fund's principal underwriter, may
participate in arrangements with selling dealers where the selling dealer
waives its right to distribution or shareholder servicing fees for selling
fund shares or servicing shareholder accounts. These arrangements typically
are intended to avoid duplicate payment of fees where the selling dealers
transactions are through an omnibus account with a different clearing broker,
and that broker is entitled to receive distribution and/or servicing fees
from the fund.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to the fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to the fund.
ADDITIONAL CLASSES
--------------------------------------------------------------------------------
The fund also offers Institutional Service Class shares, which pay marketing
or shareholder servicing fees. Since Institutional Service Class shares have
higher expenses, their performance will be lower than the performance of the
Institutional Class.
13
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of the fund for the fiscal periods indicated. Certain
information contained in the table reflects the financial results for a
single share. The total returns in the table represent the rate that an
investor would have earned on an investment in the fund assuming all
dividends and distributions were reinvested. PricewaterhouseCoopers LLP has
audited this information. The financial statements and the unqualified
opinion of PricewaterhouseCoopers LLP are included in the annual report of
the fund, which is available upon request by calling the UAM Funds at 1-877-
826-5465.
[CAPTION]
<TABLE>
Years Ended October 31, 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.52 $ 16.60 $ 14.11 $ 13.19
Income from Investment Operations:
Net Investment Income 0.08 0.07 0.06 0.09
Net Realized and Unrealized Gain (Loss) (1.17) (0.31) 4.97 2.46
Total From Investment Operations (1.09) (0.24) 5.03 2.55
Distributions:
Net Investment Income (0.08) (0.07) (0.13) (0.09)
Net Realized Gain -- (1.77) (2.41) (1.60)
Total Distributions (0.08) (1.84) (2.54) (1.69)
Capital Contribution -- -- -- 0.06
Net Asset Value, End of Period $ 13.35 $ 14.52 $ 16.60 $ 14.11
Total Return+ (7.63)% (2.10)% 42.33% 22.51%
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $135,040 $213,491 $45,060 $20,953
Ratio of Expenses to Average Net Assets 1.03% 1.03% 1.03% 1.03%
Ratio of Net Investment Income to Average
Net Assets 0.52% 0.62% 0.50% 0.75%
Portfolio Turnover Rate 121% 39% 86% 106%
</TABLE>
+ Total return would have been lower had certain fees not been waived and
certain expenses assumed by the adviser during the periods indicated.
14
<PAGE>
FMA Small Company Portfolio
Investors who want more information about the fund should read the fund's
annual/semi-annual reports and the fund's statement of additional
information. The annual/semi-annual reports of the fund provide additional
information about its investments. In the annual report, you will also find a
discussion of the market conditions and investment strategies that
significantly affected the performance of the fund during the last fiscal
year. The statement of additional information contains additional detailed
information about the fund and is incorporated by reference into (legally
part of) this prospectus.
Investors can receive free copies of the statement of additional information,
shareholder reports and other information about the UAM Funds and can make
shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about the fund (including the statement
of additional information) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get information on the operation
of the Public Reference Room by calling the Securities and Exchange
Commission at 1-202-942-8090. Reports and other information about the fund
are available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov. You may obtain copies of
------------------
this information, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
------------------
Securities and Exchange Commission's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
[LOGO OF UAM](R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
ICM Small Company Portfolio
Institutional Class Shares Prospectus March 1, 2001
[LOGO OF UAM](R)
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this
prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Fund Summary............................................................... 1
What is the Fund's Objective?........................................... 1
What are the Fund's Principal Investment Strategies?.................... 1
What are the Fund's Principal Risks?.................................... 1
How has the Fund Performed?............................................. 2
What are the Fund's Fees and Expenses?.................................. 3
Investing With the UAM Funds............................................... 4
Buying Shares........................................................... 4
Redeeming Shares........................................................ 5
Exchanging Shares....................................................... 7
Transaction Policies.................................................... 7
Account Policies........................................................ 9
Additional Information about the Fund...................................... 11
Other Investment Practices and Strategies............................... 11
Investment Management................................................... 12
Shareholder Servicing Arrangements...................................... 12
Financial Highlights....................................................... 14
</TABLE>
<PAGE>
Fund Summary
WHAT IS THE FUND'S OBJECTIVE?
--------------------------------------------------------------------------------
The fund seeks maximum, long-term total return consistent with reasonable
risk to principal, by investing primarily in common stocks of smaller
companies measured in terms of revenues and assets and, more importantly, in
terms of market capitalization. The fund may change its investment objective
without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The portfolio normally seeks to achieve its objective by investing at least
80% of its assets in common stocks of companies that have market
capitalizations within the market capitalization range of the Russell 2000
Index at the time of purchase. As of December 31, 1999, the Russell 2000
Index had a weighted average market capitalization of $1.3 billion and
consisted of companies with market capitalizations that ranged $11 million to
$13 billion. The portfolio may invest in equity securities listed on the New
York and American Stock Exchanges or traded on the over-the-counter markets
operated by the National Association of Securities Dealers, Inc. The
portfolio invests mainly in common stocks, but it may also invest in other
types of equity securities.
Typically, the adviser invests in companies that have an above-average return
on equity, are financially strong, and yet are selling at a price to earnings
ratio lower than that of most stocks represented in the S&P 500 Index. The
adviser believes stocks with such characteristics are likely to provide
competitive rates of return to investors when compared to stocks with higher
price to earnings ratios over extended periods of time and through a variety
of economic and market cycles. Using screening parameters such as price to
earnings ratios, relative return on equity, and other financial ratios, the
adviser screens the universe of potential investments of each fund to
identify potentially undervalued securities. The adviser further narrows the
list of potential investments through traditional fundamental security
analysis, which may include interviews with company management and a review
of the assessments and opinions of outside analysts and consultants.
Securities are sold when the adviser believes the shares have become
relatively overvalued or it finds more attractive alternatives. In addition,
the adviser tends to focus on those companies whose rates of earnings
momentum are accelerating and/or whose recent earnings have exceeded general
expectations.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a
1
<PAGE>
possibility that the fund will not achieve its goal. This could happen
because its strategy failed to produce the intended results or because the
adviser did not implement its strategy properly. The fund's shares are not
bank deposits and are not guaranteed, endorsed or insured by any financial
institution, government authority or the FDIC. You may lose money by
investing in the fund.
As with all equity funds, the risks that could affect the value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors that affect the securities markets generally, such as adverse changes
in economic conditions, the general outlook for corporate earnings, interest
rates or investor sentiment. Equity securities may also lose value because of
factors affecting an entire industry or sector, such as increases in
production costs, or factors directly related to a specific company, such as
decisions made by its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have narrower
product lines and more limited financial resources. Their stocks may trade
less frequently and in limited volume.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares the average annual returns of
the fund to those of a broad-based securities market index. Returns are based
on past results and are not an indication of future performance.
Calendar Year Returns
--------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
48.67% 32.28% 22.00% 3.41% 21.27% 23.01% 33.01% -0.51% 1.07%
During the periods shown in the chart for the fund, the highest return for a
quarter was __.__% (quarter ending __/__/__) and the lowest return for a
quarter was __.__% (quarter ending __/__/__).
2
<PAGE>
Average Annual Returns For Periods Ended December 31, 2000
1 Year 5 Years 10 Years
-----------------------------------------------------------------------------
ICM Small Company Portfolio
-----------------------------------------------------------------------------
Russell 2000 Value Index+
-----------------------------------------------------------------------------
Russell 2000 Index
+ Beginning this period the fund has changed its comparative broad-based
securities market index from the Russell 2000 Index Index to the Russell 2000
Value Index because it is a more appropriate benchmark for this type of fund.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell its shares, to reinvest dividends or to exchange into other UAM
Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
Management Fees 0.70%
Other Expenses [ ]%
-----------------------------------------------------------------------------
Total Annual Fund Operating Expenses* [ ]%
* "Other Expenses" presented in the table above may be higher than the expenses
you would actually pay as a shareholder in the fund. This is due to the fact
that "Other Expenses" do not take into account any expense offset arrangement
the fund may have that would reduce its custodian fee based on the amount of
cash the fund maintains with its custodian. Such an arrangement would have the
effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your
dividends and distributions and that you paid the total expenses stated above
(which do not reflect any expense limitations) throughout the period of your
investment. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------
3
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with the fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept third-
party checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the
UAM Funds. Be sure your check identifies clearly your name, your account
number and the fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to the
UAM Funds. Finally, wire your money using the wiring instructions set forth
below. To add to an existing account by wire, call 1-877-826-5465 to get a
wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
4
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to cancel
or change it.
Minimum Investments
You can open an account with the fund with a minimum initial investment of
$5,000,000. You can buy additional shares for as little as $1,000.
Fund Codes
The fund's reference information, which is listed below, will be helpful to
you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
Trading Symbol CUSIP Fund Code
-----------------------------------------------------------------------------
ICSCX 90255762 895
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting management
and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you need
more information.
5
<PAGE>
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you must
complete the appropriate sections of the account application and mail it to
the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login information,
-----------
including your personal identification number (PIN), please call 1-877-826-
5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial institution.
To participate in this service, you must complete the appropriate sections of
the account application and mail it to the UAM Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your bank
by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in proper
form.
The UAM Funds may require that a bank or member firm of a national securities
exchange guarantee signatures. A notary public cannot guarantee a signature.
Signature guarantees are for the protection of shareholders. Before they
grant a redemption request, the UAM Funds may require a shareholder to
furnish additional legal documents to insure proper authorization.
If you redeem shares that were purchased by check, you will not receive your
redemption proceeds until the check has cleared, which may take up to 15 days
from the purchase date. You may avoid these delays by paying for shares with
a certified check, bank check or money order.
6
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may suspend
your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the same
class of any other UAM Fund by writing to or calling the UAM Funds. You can
also exchange shares of the UAM Funds on the Internet at www.uam.com. For
-----------
login information, including your personal identification number (PIN),
please call 1-877-826-5465. Before exchanging your shares, please read the
prospectus of the UAM Fund for which you want to exchange. You may obtain any
UAM Fund prospectus by calling 1-877-826-5465. You may only exchange shares
between accounts with identical registrations (i.e., the same names and
addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days when
the New York Stock Exchange is closed, the value of a UAM Fund may change on
days when you are unable to purchase or redeem shares.
7
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their assets,
subtracting their liabilities and then dividing the result by the number of
shares outstanding. The UAM Funds use current market prices to value their
investments. However, the UAM Funds may value investments at fair value when
market prices are not readily available or when events occur that make
established valuation methods (such as stock exchange closing prices)
unreliable. The UAM Funds will determine an investment's fair value according
to methods established by the Board. The UAM Funds value debt securities that
are purchased with remaining maturities of 60 days or less at amortized cost,
which approximates market value. The UAM Funds may use a pricing service to
value some of their assets, such as debt securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial intermediary
(such as a financial planner or adviser). Generally, to buy or sell shares at
the NAV of any given day your financial intermediary must receive your order
before the close of trading on the New York Stock Exchange that day. Your
financial intermediary is responsible for transmitting all purchase and
redemption requests, investment information, documentation and money to the
UAM Funds on time. Your financial intermediary may charge additional
transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do so,
it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities instead
of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The UAM Funds will not be responsible
for any loss, liability, cost or expense for following instructions received
by telephone reasonably believed to be genuine.
8
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value of
your account falls below 50% of the required minimum initial investment. This
provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations and
not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, the fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of the fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in the fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such accounts
may, however, be taxable at some time in the future. You should always
consult your tax advisor for specific guidance regarding the tax effect of
your investment in the UAM Funds.
Taxes on Distributions Distributions of the fund will generally be taxable
to shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in cash
or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time the fund held its
investments, not how long you held your shares. Dividends and distributions
of short-term capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as long-
term capital gains. Once a year UAM Funds will send you a statement showing
the types and total amount of distributions you received during the previous
year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided.
9
<PAGE>
The fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received deduction,
subject to certain holding period requirements and financing limitations.
If the fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the fund received
from sources in foreign countries. The fund may elect to treat some of those
taxes as a distribution to shareholders, which would allow shareholders to
offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in the
fund, you may recognize a capital gain or loss for federal tax purposes. This
gain or loss will be based on the difference between the cost of your shares
(tax basis) and the amount you receive for them. To aid in computing your tax
basis, you should keep your account statements for the periods during which
you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you realize
on shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain distributions you received
on the shares.
Backup Withholding By law, the fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct taxpayer
information, (ii) to properly include on your return payments of taxable
interest or dividends, or (iii) to certify to the fund that you are not
subject to back-up withholding when required to do so or that you are an
"exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of distributions
that are attributable to interest on federal securities. As mentioned above,
you should always consult your tax advisor for specific guidance regarding
the tax effect of your investment in the fund.
10
<PAGE>
Additional Information about the Fund
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, the fund may use the
investment strategies described below. The fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of the fund's investment practices and its risks, you should read the
SAI.
Derivatives
The fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify the fund's gains or losses. There are various factors that
affect the fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives the fund
buys or sells. The fund could be negatively affected if the change in market
value of its securities fails to correlate perfectly with the values of the
derivatives it purchased or sold.
American Depositary Receipts (ADRs)
The fund may invest up to 20% of its total assets in ADRs. ADRs are
certificates evidencing ownership of shares of a foreign issuer that are
issued by depositary banks and generally trade on an established market in
the United States or elsewhere. Although they are alternatives to directly
purchasing the underlying foreign securities in their national markets and
currencies, ADRS continue to be subject to many of the risks associated with
investing directly in foreign securities.
Foreign securities, especially those of companies in emerging markets, can be
riskier and more volatile than domestic securities. Adverse political and
economic developments or changes in the value of foreign currency can make it
harder for a fund to sell its securities and could reduce the value of your
shares. Changes in tax and accounting standards and difficulties obtaining
information about foreign companies can negatively affect investment
decisions.
11
<PAGE>
Short-Term Investing
At times, the adviser may decide to invest up to 100% of the fund's assets in
a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities
for temporary defensive purposes, to earn a return on uninvested assets or to
meet redemptions. The adviser may temporarily adopt a defensive position to
reduce changes in the value of the shares of the fund that may result from
adverse market, economic, political or other developments. When the adviser
pursues a temporary defensive strategy, the fund may not profit from
favorable developments that it would have otherwise profited from if it were
pursuing its normal strategies. Likewise, these strategies may prevent the
fund from achieving its stated objectives.
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
Investment Counselors of Maryland, Inc., a Maryland corporation located at
803 Cathedral Street, Baltimore, Maryland 21201, is the fund's investment
adviser. The adviser manages and supervises the investment of the fund's
assets on a discretionary basis. The adviser has provided investment
management services to corporations, pension and profit sharing plans,
trusts, estates and other institutions and individuals. During its most
recent fiscal year, the fund paid _.__% in management fees to its adviser,
expressed as a percentage of average net assets.
Portfolio Managers
A team of the adviser's investment professionals has primary responsibility
for the day-to-day management of the fund.
SHAREHOLDER SERVICING ARRANGEMENTS
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial representatives
may receive compensation from the fund or its service providers for providing
a variety of services. This section briefly describes how the financial
representatives may get paid.
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of the fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with the
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of the fund or for servicing your
account. Your financial representative should provide you with a schedule of
its fees and services.
12
<PAGE>
The fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure that
the fees paid are appropriate for the services performed. The fund does not
pay these service fees on shares purchased directly. In addition, the adviser
and its affiliates may, at their own expense, pay financial representatives
for these services.
UAM Fund Distributors Inc., the fund's principal underwriter may participate
in arrangements with selling dealers where the selling dealer waives its
right to distribution of shareholder servicing fees for selling fund shares
or servicing shareholder accounts. These arrangements typically are intended
to avoid duplicate payment of fees, where the selling dealer's transactions
are through an omnibus account with a different clearing broker, and that
broker is entitled to receive distribution and/or servicing fees from the
fund.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to the fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to the fund.
13
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of the fund for the fiscal periods indicated. Certain
information contained in the table reflects the financial results for a
single share. The total returns in the table represent the rate that an
investor would have earned on an investment in the fund assuming all
dividends and distributions were reinvested. PricewaterhouseCoopers LLP has
audited this information. The financial statements and the unqualified
opinion of PricewaterhouseCoopers LLP are included in the annual report of
the fund, which is available upon request by calling the UAM Funds at 1-877-
826-5465.
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 24.35 $ 27.82 $ 20.71 $ 19.04
Income from Investment Operations:
Net Investment Income 0.29 0.28 0.23 0.24
Net Realized and Unrealized Gain (Loss) (0.30) (1.58) 8.27 2.59
Total From Investment Operations (0.01) (1.30) 8.50 2.83
Distributions:
Net Investment Income (0.29) (0.24) (0.20) (0.24)
Net Realized Gain (1.42) (1.93) (1.19) (0.92)
Total Distributions (1.71) (2.17) (1.39) (1.16)
Net Asset Value, End of Period $ 22.63 $ 24.35 $ 27.82 $ 20.71
Total Return (0.13)% (5.04)% 43.28% 15.62%
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $559,980 $618,590 $518,377 $320,982
Ratio of Expenses to Average Net Assets 0.85% 0.89% 0.89% 0.88%
Ratio of Net Investment Income to Average
Net Assets 1.18% 1.12% 0.97% 1.20%
Portfolio Turnover Rate 32% 22% 23% 23%
</TABLE>
14
<PAGE>
ICM Small Company Portfolio
Investors who want more information about the fund should read the fund's
annual/semi-annual reports and the fund's statement of additional
information. The annual/semi-annual reports of the fund provide additional
information about its investments. In the annual report, you will also find a
discussion of the market conditions and investment strategies that
significantly affected the performance of the fund during the last fiscal
year. The statement of additional information contains additional detailed
information about the fund and is incorporated by reference into (legally
part of) this prospectus.
Investors can receive free copies of the statement of additional information,
shareholder reports and other information about the UAM Funds and can make
shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about the fund (including the statement
of additional information) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get information on the operation
of the Public Reference Room by calling the Securities and Exchange
Commission at 1-202-942-8090. Reports and other information about the fund
are available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov. You may obtain copies of
------------------
this information, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
------------------
Securities and Exchange Commission's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
[LOGO of UAM](R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
The McKee Portfolios
Institutional Class Shares March 1, 2001
McKee Domestic Equity Portfolio
McKee International Equity Portfolio
McKee Small Cap Equity Portfolio
[LOGO]
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
McKee Domestic Equity Portfolio......................................... 4
What are the Fund's Objectives?....................................... 4
What are the Fund's Principal Investment Strategies?.................. 4
What are the Fund's Principal Risks?.................................. 4
How has the Fund Performed?........................................... 5
What are the Fund's Fees and Expenses?................................ 5
McKee International Equity Portfolio.................................... 7
What are the Fund's Objectives?....................................... 7
What are the Fund's Principal Investment Strategies?.................. 7
What are the Fund's Principal Risks?.................................. 7
How has the Fund Performed?........................................... 8
What are the Fund's Fees and Expenses?................................ 9
McKee Small Cap Equity Portfolio........................................ 10
What are the Fund's Objectives?....................................... 10
What are the Fund's Principal Investment Strategies?.................. 10
What are the Fund's Principal Risks?.................................. 10
How has the Fund Performed?........................................... 11
What are the Fund's Fees and Expenses?................................ 12
Investing with the UAM Funds............................................ 13
Buying Shares......................................................... 13
Redeeming Shares...................................................... 14
Exchanging Shares..................................................... 16
Transaction Policies.................................................. 16
Account Policies...................................................... 18
Additional Information about the Funds.................................. 20
Other Investment Practices and Strategies............................. 20
Investment Management................................................. 21
Shareholder Servicing Arrangements.................................... 22
Financial Highlights.................................................... 24
McKee Domestic Equity Portfolio....................................... 25
McKee International Equity Portfolio.................................. 25
McKee Small Cap Equity Portfolio...................................... 26
</TABLE>
<PAGE>
McKee Domestic Equity Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Domestic Equity Portfolio seeks a superior long-term total return over a
market cycle by investing primarily in equity securities of U.S. issuers. The
fund may change its objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Domestic Equity Portfolio normally seeks to achieve its goal by investing
at least 65% of its assets in equity securities of U.S. companies with medium
to large market capitalizations (typically over $1 billion at the time of
purchase) that are listed on a national exchange or traded over the counter.
The stock selection process begins by screening the companies in which the
fund may invest to identify potentially undervalued securities. Such screens
include price/earnings ratios, earnings momentum and earnings surprise.
Stocks in the top 25% of each economic sector (a group of industries used to
categorize and divide securities) as determined by the above screens will form
the adviser's focus list. Using fundamental security analysis, company
management interviews and an assessment of the opinions of street analysts and
consultants, the adviser selects the fund of stocks from the focus list with
the best combination of value and earnings momentum. The adviser looks for
companies with strong balance sheets, competent management and comparative
business advantages such as costs, products and geographical location. The
fund attempts to manage risk by broadly and systematically diversifying its
investments. The adviser believes that the fund can achieve a broad
diversification by maintaining exposure to most major economic sectors and
industries represented in the S&P 500 Index
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could happen
because its strategy failed to produce the intended results or because the
adviser did not implement its strategy properly. The fund's shares are not
bank deposits and are not guaranteed, endorsed or insured by any financial
institution, government authority or the FDIC. You may lose money by investing
in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors
4
<PAGE>
that affect the securities markets generally, such as adverse changes in
economic conditions, the general outlook for corporate earnings, interest
rates or investor sentiment. Equity securities may also lose value because of
factors affecting an entire industry or sector, such as increases in
production costs, or factors directly related to a specific company, such as
decisions made by its management. This risk is greater for small and medium
sized companies, which tend to be more vulnerable to adverse developments than
larger companies.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares average annual returns the fund
to those of a broad-based securities market index. Returns are based on past
results and are not an indication of future performance.
Calendar Year Returns
22.51% 20.86% 11.86% 10.40%
1996 1997 1998 1999 2000
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a quarter
was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31,2000
1 Year 5 Years Since 3/2/95*
==============================================================================
McKee Domestic Equity Portfolio
------------------------------------------------------------------------------
S&P 500 Index
* Beginning of operations. Index comparisons begin on February 28, 1995.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell its shares, to reinvest dividends or to exchange into other UAM
Funds.
5
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay them
indirectly. This table describes the fees and expenses that you may pay if you
buy and hold shares of the fund.
Management Fees 0.65%
Other Expenses* _.__%
-----------------------------------------------------------------------------
Total Annual Fund Operating Expenses _.__%
* "Other Expenses" presented in the table above may be higher than the
expnses you would actually pay as a shareholder in the fund. This is due
to the fact that "Other Expenses" do not take into account any expense
offset arrangement the fund may have that would reduce its custodian fee
based on the amount of cash the fund maintains with its custodian. Such an
arrangement would have the effect of reducing a portfolio's expenses.
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above (which do
not reflect any expense limitations) throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
6
<PAGE>
McKee International Equity Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The International Equity Portfolio seeks a superior long-term total return
over a market cycle by investing primarily in the equity securities of non-
U.S. issuers. The fund may change its objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The International Equity Portfolio normally seeks to achieve its goal by
investing at least 65% of its assets in companies located in at least three
countries other than the U.S.
The stock selection process begins by screening the companies in which the
fund may invest to identify potentially undervalued securities. Such screens
include price/earnings ratios, earnings momentum and earnings surprise.
Stocks in the top 25% of each economic sector (a group of industries used to
categorize and divide securities) as determined by the above screens will form
the adviser 's focus list. Using fundamental security analysis, company
management interviews and an assessment of the opinions of street analysts and
consultants, the adviser selects the fund of stocks from the focus list with
the best combination of value and earnings momentum. The adviser looks for
companies with strong balance sheets, competent management and comparative
business advantages such as costs, products and geographical location.
The fund will attempt to minimize risk through systematic country and economic
sector diversification. The adviser will deliberately allocate the assets of
the portfolio to most major markets and industries within the Morgan Stanley
Capital International EAFE Index. However, the fund may buy stocks that are
not included in countries and industries comprising the Morgan Stanley Capital
International EAFE Index. Based on this strategy the fund will generally hold
more than 50 stocks selected from at least 15 countries.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could happen
because its strategy failed to produce the intended results or because the
adviser did not implement its strategy properly. The fund's shares are not
bank deposits and are not guaranteed, endorsed or insured by any financial
institution, government authority or the FDIC. You may lose money by investing
in the fund.
7
<PAGE>
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors that affect the securities markets generally, such as adverse changes
in economic conditions, the general outlook for corporate earnings, interest
rates or investor sentiment. Equity securities may also lose value because of
factors affecting an entire industry or sector, such as increases in
production costs, or factors directly related to a specific company, such as
decisions made by its management.
When the fund invests in foreign securities, it will be subject to risks not
typically associated with domestic securities. Foreign investments can be
riskier and more volatile than investments in the United States. Adverse
political and economic developments or changes in the value of foreign
currency can make it harder for a portfolio to sell its securities and could
reduce the value of your shares. Differences in tax and accounting standards
and difficulties in obtaining information about foreign companies can
negatively affect investment decisions. Unlike more established markets,
emerging markets may have governments that are less stable, markets that are
less liquid and economies that are less developed.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares average annual returns the fund
to those of a broad-based securities market index. Returns are based on past
results and are not an indication of future performance.
Calendar Year Returns
[CHART]
8.87% 10.51% 11.32% 8.94% 43.69%
----- ------ ------ ----- ------
1995 1996 1997 1998 1999
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a quarter
was ___% (quarter ending ______).
8
<PAGE>
Average Annual Returns For Periods Ended December 31,2000
Since
1 Year 5 Years 5/26/94*
==============================================================================
McKee International Equity Portfolio
------------------------------------------------------------------------------
Morgan Stanley Capital International EAFE Index
* Beginning of operations. Index comparisons begin on May 31, 1994.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and
old shares of the fund.
Shareholder Fees (fees paid directly from your investment)
------------------------------------------------------------------------------
Redemption Fee (as a percentage of amount 1.00%#
redeemed)
------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from
the assets of the fund)
------------------------------------------------------------------------------
Management Fee 0.70%
Other Expenses _.__%
------------------------------------------------------------------------------
Total Annual Fund Operating Expenses _.__%
------------------------------------------------------------------------------
# Shareholders pay a redemption fee when they redeem shares held for less
than the number of days listed under "Redemption Fee" in the section on
"Transaction Policies."
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above (which do
not reflect any expense limitations) throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
9
<PAGE>
McKee Small Cap Equity Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Small Cap Equity Portfolio seeks a superior long-term total return by
investing primarily in the equity securities of small companies. The fund may
change its objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
Under normal circumstances, the Small Cap Equity Portfolio invests at least
65% of its assets in companies with small market capitalizations at the time
of initial purchase. The fund considers a company to have a small market
capitalization when its market capitalization is less than $1 billion or when
its market capitalization falls within the market capitalization range of the
Russell 2000 Index. As of December 31, 2000, the Russell 2000 Index had a
weighted average market capitalization of $____ billion. As of the same date
the smallest company in the Russell 2000 had a market capitalization of $___
million and the largest company had a market capitalization of $___ billion.
The stock selection process begins by screening the companies in which the
fund may invest to identify potentially undervalued securities. Such screens
include price/earnings ratios, earnings momentum and earnings surprise.
Stocks in the top 25% of each economic sector (a group of industries used to
categorize and divide securities) as determined by the above screens will form
the adviser's focus list. Using fundamental security analysis, company
management interviews and an assessment of the opinions of street analysts and
consultants, the adviser selects the fund of stocks from the focus list with
the best combination of value and earnings momentum. The adviser looks for
companies with strong balance sheets, competent management and comparative
business advantages such as costs, products and geographical location.
The fund attempts to manage risk by broadly and systematically diversifying
its investments. The adviser believes that the fund can achieve a broad
diversification by maintaining exposure to most major economic sectors and
industries that comprise the Russell 2000 Index.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could happen
because its strategy failed to produce the intended results or because the
adviser did not implement its strategy properly. The fund's shares are not
bank deposits and are not guaranteed, endorsed or insured by any financial
institution,
10
<PAGE>
government authority or the FDIC. You may lose money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors that affect the securities markets generally, such as adverse changes
in economic conditions, the general outlook for corporate earnings, interest
rates or investor sentiment. Equity securities may also lose value because of
factors affecting an entire industry or sector, such as increases in
production costs, or factors directly related to a specific company, such as
decisions made by its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have narrower
product lines and more limited financial resources. Their stocks may trade
less frequently and in limited volume.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares average annual returns the fund
to those of a broad-based securities market index. Returns are based on past
results and are not an indication of future performance.
Calendar Year Returns
[CHART]
-9.11 -1.34 [ ]
1998 1999 2000
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a quarter
was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31,2000
1 Year Since 11/4/97*
--------------------------------------------------------------------
McKee Small Cap Equity Portfolio
--------------------------------------------------------------------
Russell 2000 Index
* Beginning of operations. Index comparisons begin on October 31,
1997.
11
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
Shareholder Fees (fees paid directly from your investment)
------------------------------------------------------------------------------
Redemption Fee (as a percentage of amount 1.00%#
redeemed)
------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from
the assets of the fund)
------------------------------------------------------------------------------
Management Fee 1.00%
------------------------------------------------------------------------------
Other Expenses _.__%
------------------------------------------------------------------------------
Total Annual Fund Operating Expenses _.__%
# Shareholders pay a redemption fee when they redeem shares held for less
than the number of days listed under "Redemption Fee" in the section on
"Transaction Policies."
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above (which do
not reflect any expense limitations) throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
==============================================================================
12
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with a fund by sending a check or money order and your
account application to the UAM Funds. You should make your check or money
order payable to the "UAM Funds." The UAM Funds do not accept third-party
checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the UAM
Funds. Be sure your check identifies clearly your name, your account number
and a fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to the
UAM Funds. Finally, wire your money using the wiring instructions set forth
below. To add to an existing account by wire, call 1-877-826-5465 to get a
wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
13
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to cancel
or change it.
Minimum Investments
You can open an account with either fund with a minimum initial investment of
$2,500 ($500 for individual retirement accounts (IRAs) and $250 for Spousal
IRAs). You can buy additional shares for as little as $100.
Fund Codes
Each fund's reference information, which is listed below, will be helpful to
you when you contact the UAM Funds to purchase or exchange shares, check daily
net asset value per share (NAV) or get additional information.
<TABLE>
<CAPTION>
Fund Name Trading Symbol CUSIP Fund Code
================================================================================
<S> <C> <C> <C>
McKee Domestic Equity Portfolio MKDEX 902555747 896
--------------------------------------------------------------------------------
McKee International Equity MKIEX 902555739 897
Portfolio
--------------------------------------------------------------------------------
McKee Small Cap Equity Portfolio MKSSX 902555366 898
</TABLE>
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting management
and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity in
which they are registered must sign the letter.
14
<PAGE>
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you need
more information.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Redemption Fee
The fund will deduct a 1.00% redemption fee from the redemption proceeds of
any shareholder redeeming shares of the fund held for less than twelve months.
The fund will retain the fee for the benefit of the remaining shareholders.
The fund charges the redemption fee to help minimize the impact the redemption
may have on the performance of the fund, to facilitate fund management and to
offset certain transaction costs and other expenses the fund incurs because of
the redemption. The fund also charges the redemption fee to discourage market
timing by those shareholders initiating redemptions to take advantage of
short-term market movements.
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To participate
in this service and to receive your redemptions by wire, you must complete the
appropriate sections of the account application and mail it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login information,
-----------
including your personal identification number (PIN), please call 1-877-826-
5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial institution.
To participate in this service, you must complete the appropriate sections of
the account application and mail it to the UAM Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your bank
by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in proper
form.
The UAM Funds may require that a bank or member firm of a national securities
exchange guarantee signatures. A notary public cannot guarantee a signature.
Signature guarantees are for the protection of shareholders. Before they grant
a redemption request, the UAM Funds may require a shareholder to furnish
additional legal documents to insure proper authorization.
If you redeem shares that were purchased by check, you will not receive your
redemption proceeds until the check has cleared, which may take up to 15 days
from the purchase date. You may avoid these delays by paying for shares with
a certified check, bank check or money order.
15
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may suspend
your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the same
class of any other UAM Fund by writing to or calling the UAM Funds. You can
also exchange shares of the UAM Funds on the Internet at www.uam.com. For
-----------
login information, including your personal identification number (PIN), please
call 1-877-826-5465. Before exchanging your shares, please read the
prospectus of the UAM Fund for which you want to exchange. You may obtain any
UAM Fund prospectus by calling 1-877-826-5465. You may only exchange shares
between accounts with identical registrations (i.e., the same names and
addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept your
order before the close of trading on the New York Stock Exchange that day.
Otherwise, you will receive the NAV that is calculated at the close of trading
on the following business day.
Since securities that are traded on foreign exchanges may trade on days when
the New York Stock Exchange is closed, the value of a UAM Fund may change on
days when you are unable to purchase or redeem shares.
16
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their assets,
subtracting their liabilities and then dividing the result by the number of
shares outstanding. The UAM Funds use current market prices to value their
investments. However, the UAM Funds may value investments at fair value when
market prices are not readily available or when events occur that make
established valuation methods (such as stock exchange closing prices)
unreliable. The UAM Funds will determine an investment's fair value according
to methods established by the Board. The UAM Funds value debt securities that
are purchased with remaining maturities of 60 days or less at amortized cost,
which approximates market value. The UAM Funds may use a pricing service to
value some of their assets, such as debt securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial intermediary
(such as a financial planner or adviser). Generally, to buy or sell shares at
the NAV of any given day your financial intermediary must receive your order
before the close of trading on the New York Stock Exchange that day. Your
financial intermediary is responsible for transmitting all purchase and
redemption requests, investment information, documentation and money to the
UAM Funds on time. Your financial intermediary may charge additional
transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that allow
them to enter confirmed purchase or redemption orders on behalf of clients and
customers. Under this arrangement, the financial intermediary must send your
payment to the UAM Funds by the time they price their shares on the following
business day. If your financial intermediary fails to do so, it may be
responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities instead
of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The UAM Funds will not be responsible
for any loss, liability, cost or expense for following instructions received
by telephone reasonably believed to be genuine.
17
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value of
your account falls below 50% of the required minimum initial investment. This
provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations and
not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you 60
days to increase the value of your account.
Distributions
Normally, each fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of a fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of investing
in a fund. This summary does not apply to shares held in an individual
retirement account or other tax-qualified plan, which are not subject to
current tax. Transactions relating to shares held in such accounts may,
however, be taxable at some time in the future. You should always consult your
tax advisor for specific guidance regarding the tax effect of your investment
in the UAM Funds.
Taxes on Distributions Distributions of a fund will generally be taxable to
shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in cash
or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time a fund held its investments,
not how long you held your shares. Dividends and distributions of short-term
capital gains (capital gains relating to securities held for twelve months or
less) are generally taxable at the same rate as ordinary income.
Distributions of long-term capital gains (capital gains relating to securities
held for more than twelve months) are generally taxable as long-term capital
gains. Once a year UAM Funds will send you a statement showing the types and
total amount of distributions you received during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided.
18
<PAGE>
A fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S. corporations
may be eligible for the corporate dividends-received deduction, subject to
certain holding period requirements and financing limitations.
If a fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received from
sources in foreign countries. A fund may elect to treat some of those taxes
as a distribution to shareholders, which would allow shareholders to offset
some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in a
fund, you may recognize a capital gain or loss for federal tax purposes. This
gain or loss will be based on the difference between the cost of your shares
(tax basis) and the amount you receive for them. To aid in computing your tax
basis, you should keep your account statements for the periods during which
you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you realize
on shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gain distributions you received on
the shares.
Backup Withholding By law, a fund must withhold 31% of your distributions and
redemption proceeds if you fail (i) to provide complete, correct taxpayer
information, (ii) to properly include on your return payments of taxable
interest or dividends, or (iii) to certify to the fund that you are not
subject to back-up withholding when required to do so or that you are an
"exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of distributions
that are attributable to interest on federal securities. As mentioned above,
you should always consult your tax advisor for specific guidance regarding the
tax effect of your investment in a fund.
19
<PAGE>
Additional Information about the Funds
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, each fund may use the
investment strategies described below. Each fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of a fund's investment practices and its risks, you should read the SAI.
Derivatives
A fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify a fund's gains or losses. There are various factors that
affect a fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives a fund
buys or sells. A fund could be negatively affected if the change in market
value of its securities fails to correlate perfectly with the values of the
derivatives it purchased or sold.
Foreign Securities
Foreign securities include securities of companies located outside the United
States and American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs) and other similar global instruments. ADRs are certificates evidencing
ownership of shares of a foreign issuer that are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. EDRs are similar to ADRs, except that European Banks or trust
companies typically issue them. Although ADRs and EDRs are alternatives to
directly purchasing the underling foreign securities in their national markets
and currencies, they continue to be subject to many of the risks associated
with investing directly in foreign securities.
Foreign equity and fixed income 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.
Local political, economic, regulatory or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. A foreign government may act adversely to the interests of U.S.
investors. Such actions may include expropriation or nationalization of
assets, confiscatory taxation and other restrictions on U.S. investment.
Changes in foreign currency rates and in exchange control regulations may
positively or negatively affect the value of its securities. The adviser may
try to mitigate those risks by engaging in such currency hedging transactions
as the manager deems necessary, including hedging the foreign currency value
of the securities back into U.S. dollars and translating any gains, losses,
income or expenses back into U.S. dollars. These transactions may include
foreign exchange transactions, as well as foreign currency futures, currency
options, and currency swap contracts. The adviser may, however, choose to
leave certain foreign assets unhedged if the anticipated movement in
currencies favors such a position.
Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the United States. Securities of some
foreign issuers may be less liquid and more volatile than securities of
comparable U.S. issuers. In addition, the costs associated with foreign
investments, including withholding taxes, brokerage commissions and custodial
costs, are generally higher than the costs associated with U.S. investments.
Foreign countries generally have different legal systems and different
regulations concerning financial disclosure, accounting and auditing standards
than the United States. This could make corporate financial information more
difficult to obtain or understand and less reliable than information about
U.S. companies.
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,
may present the risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets.
. They may protect property rights less than more developed countries.
. The economies of countries with emerging markets may be 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 of countries with emerging 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.
20
<PAGE>
Short-Term Investing
At times, the adviser may decide to invest up to 100% of a fund's assets in a
variety of high-quality, short-term debt securities, such as U.S. government
securities. The adviser may invest in these types of securities for temporary
defensive purposes, to earn a return on uninvested assets or to meet
redemptions. The adviser may temporarily adopt a defensive position to reduce
changes in the value of the shares of a fund that may result from adverse
market, economic, political or other developments. When the adviser pursues a
temporary defensive strategy, a fund may not profit from favorable
developments that it would have otherwise profited from if it were pursuing
its normal strategies. Likewise, these strategies may prevent a fund from
achieving its stated objectives.
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
C.S. McKee & Co., Inc., a Pennsylvania corporation located at One Gateway
Center, Pittsburgh, PA 15222, is each fund's investment adviser. The adviser
manages and supervises the investment of each fund's assets on a discretionary
basis. The adviser 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 following table lists the management fees the funds paid to the adviser
during their most recent fiscal year, expressed as a percentage of average net
assets:
<TABLE>
<CAPTION>
Domestic International Small Cap
Equity Equity Equity
Portfolio Portfolio Portfolio
-----------------------------------------------------------------
<S> <C> <C> <C>
Management Fee 0.65% 0.70% 1.00%
</TABLE>
Portfolio Managers
21
<PAGE>
Domestic Equity Portfolio
Gregory M. Melvin and Robert A. McGee are primarily responsible for the day to
day management of the Domestic Equity Portfolio. Mr. Melvin is the adviser's
chief investment officer. He joined the adviser as its Director of Equities in
2000 after 6 years at Dartmouth Capital where he served as President and Chief
Investment Officer. Mr. McGee is a portfolio manager responsible for equity
investments. He joined the adviser in 2000 after eight years as Chief
Investment Officer with First Commonwealth Trust Company.
International Equity Portfolio
Gregory M. Melvin and William J. Andrews are primarily responsible for the day
to day management of the International Equity Portfolio. Mr. Melvin's
biography is provided above under Domestic Equity Portfolio. Mr. Andrews is a
portfolio manager responsible for equity investments. He joined the adviser in
1983.
Small Cap Equity Portfolio
Gregory M. Melvin and Amit Dugar are primarily responsible for the day to day
management of the Small Cap Equity Portfolio. Mr. Melvin's biography is
provided above under Domestic Equity Portfolio. Mr. Dugar is a quantitative
analyst and portfolio manager responsible for equity investments. He joined
the adviser in 1998 after five years as an equity analyst with C.H. Dean &
Associates.
SHAREHOLDER SERVICING ARRANGEMENTS
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial representatives
may receive compensation from a fund or its service providers for providing a
variety of services. This section briefly describes how the financial
representatives may get paid.
For providing certain services to their clients, financial representatives may
be paid a fee based on the assets of a fund that are attributable to the
financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with a fund.
In addition, your financial representatives may charge you other account fees
for buying or redeeming shares of a fund or for servicing your account. Your
financial representative should provide you with a schedule of its fees and
services.
A fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure that
the fees paid are appropriate for the services performed. A fund does not pay
these service fees on shares purchased directly. In addition, the adviser and
its affiliates may, at their own expense, pay financial representatives for
these services.
UAM Fund Distributors, Inc. the funds' principal underwriter, may participate
in arrangements with selling dealers where the selling dealer waives its right
to distribution or shareholder servicing fees for selling fund shares or
servicing shareholder accounts. These arrangements typically are intended to
avoid duplicate payment of fees where the selling dealers transactions are
through an omnibus account with a different clearing broker, and that broker
is entitled to receive distribution and/or servicing fees from the funds.
22
<PAGE>
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with respect
to a fund. The adviser may also pay its affiliated companies for distribution
and marketing services performed with respect to a fund.
23
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of each fund for the past five years. Certain
information contained in the table reflects the financial results for a single
share. The total returns in the table represent the rate that an investor
would have earned on an investment in each fund assuming all dividends and
distributions were reinvested. PricewaterhouseCoopers LLP has audited this
information. The financial statements and the unqualified opinion of
PricewaterhouseCoopers LLP are included in the annual report of the funds,
which is available upon request by calling the UAM Funds at
1-877-826-5465.
24
<PAGE>
<TABLE>
<CAPTION>
MCKEE DOMESTIC EQUITY PORTFOLIO
----------------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997 1996
======================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 16.03 $ 16.86 $ 13.38 $ 11.44
Income from Investment
Operations:
Net Investment Income 0.06 0.08 0.10 0.10
Net Realized and Unrealized
Gain (Loss) 1.50 0.46 3.92 2.08
Total From Investment Operations 1.56 0.54 4.02 2.18
Distributions:
Net Investment Income (0.06) (0.08) (0.10) (0.09)
Net Realized Gain (5.89) (1.29) (0.44) (0.15)
Total Distributions (5.95) (1.37) (0.54) (0.24)
Net Asset Value, End of Period $ 11.64 $ 16.03 $ 16.86 $ 13.38
Total Return 13.76% 3.36% 30.96% 19.31%+
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $ 41,987 $ 49,387 $107,389 $ 62,170
Ratio of Expenses to Average
Net Assets 1.05% 1.02% 0.94% 0.99%
Ratio of Net Investment Income
to Average Net Assets 0.51% 0.46% 0.64% 0.93%
Portfolio Turnover Rate 93% 61% 47% 42%
</TABLE>
* Annualized
@ Not annualized
# For the period March 2, 1995 (commencement of operations) to October 31,
1995.
+ Total return would have been different had certain fees not been waived and
certain expenses not been assumed by the adviser during the periods
indicated.
<TABLE>
<CAPTION>
MCKEE INTERNATIONAL EQUITY PORTFOLIO
----------------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997 1996
======================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of $ 11.23 $ 12.42 $ 10.55 $ 10.03
Period
Income from Investment 0.11 0.12 0.11 0.09
Operations:
Net Investment Income
Net Realized and Unrealized 3.20 (0.03) 2.01 0.73
Gain (Loss)
Total From Investment 3.31 0.09 2.12 0.82
Operations
Distributions:
Net Investment Income (0.09) (0.11) (0.11) (0.09)
Net Realized Gain (0.41) (1.17) (0.14) (0.21)
Total Distributions (0.50) (1.28) (0.25) (0.30)
Net Asset Value, End of Period $ 14.04 $ 11.23 $ 12.42 $ 10.55
Total Return 30.33% 1.18% 20.31% 8.29%
Ratios and Supplemental Data $172,027 $134,075 $103,050 $ 91,224
Net Assets, End of Period
(Thousands)
Ratio of Expenses to Average 1.02% 1.00% 0.98% 1.01%
Net Assets
Ratio of Net Investment 1.05% 1.08% 0.95% 0.92%
Income to Average Net Assets
Portfolio Turnover Rate 40% 20% 29% 9%
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
MCKEE SMALL CAP EQUITY PORTFOLIO
---------------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997 1996
=====================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 11.23 $ 12.42 $ 8.46 $ 10.00
Income from Investment
Operations:
Net Investment Income 0.11 0.12 (0.02) (0.01)
Net Realized and Unrealized
Gain (Loss) 3.20 (0.03) 0.09 (1.52)
Total From Investment
Operations 3.31 0.09 0.07 (1.53)
Distributions:
Net Realized Gain (0.41) (1.17) (0.07) (0.01)
Net Asset Value, End of Period $ 14.04 $ 11.23 $ 8.46 $ 8.46
Total Return 30.33% 1.18% 0.81% (15.36)%@
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $172,027 $134,075 $81,563 $ 81,451
Ratio of Expenses to Average
Net Assets 1.02% 1.00% 1.26% 1.27%*
Ratio of Net Investment
Income to Average Net Assets 1.05% 1.08% (0.18)% (0.12)%*
Portfolio Turnover Rate 40% 20% 53% 5%
</TABLE>
* Annualized
@ Not annualized
** For the period from November 4, 1997 (commencement of operations) to October
31, 1998.
26
<PAGE>
The McKee Portfolios
Investors who want more information about a fund should read the fund's
annual/semi-annual reports and the funds' statement of additional information.
The annual/semi-annual reports of a fund provide additional information about
its investments. In the annual report, you will also find a discussion of the
market conditions and investment strategies that significantly affected the
performance of each fund during the last fiscal year. The statement of
additional information contains additional detailed information about the
funds' and is incorporated by reference into (legally part of) this
prospectus.
Investors can receive free copies of the statement of additional information,
shareholder reports and other information about the UAM Funds and can make
shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about a fund (including the statement of
additional information) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get information on the operation of
the Public Reference Room by calling the Securities and Exchange Commission at
1-202-942-8090. Reports and other information about a fund are available on
the EDGAR Database on the Securities and Exchange Commission's Internet site
at http://www.sec.gov. You may obtain copies of this information, after paying
------------------
a duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the Securities and Exchange Commission's
------------------
Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
UAM(R)
<PAGE>
UAM Funds
Funds for the Informed Investor (SM)
NWQ Special Equity Portfolio
Institutional Class Shares Prospectus March 1, 2001
[LOGO OF UAM](R)
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this
prospectus.
Any representation to the contrary is a criminal offence.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Fund Summary.................................................................. 1
What is the Fund's Objective?.............................................. 1
What are the Fund's Principal Investment Strategies?....................... 1
What are the Fund's Principal Risks?....................................... 1
How has the Fund Performed?................................................ 2
What are the Fund's Fees and Expenses?..................................... 3
Investing With The UAM Funds.................................................. 4
Buying Shares.............................................................. 4
Redeeming Shares........................................................... 5
Exchanging Shares.......................................................... 7
Transaction Policies....................................................... 7
Account Policies........................................................... 9
Additional Information about the Fund......................................... 11
Other Investment Practices and Strategies.................................. 11
Investment Management...................................................... 12
Shareholder Servicing Arrangements......................................... 12
Financial Highlights.......................................................... 17
</TABLE>
<PAGE>
FUND SUMMARY
What is the Fund's Objective?
--------------------------------------------------------------------------------
The fund seeks long-term capital appreciation by investing primarily in
common stocks and other equity securities of companies, which in the
adviser's opinion are undervalued at the time of purchase and offer the
potential for above-average appreciation. The fund may change its
investment objective without shareholder approval.
What are the Fund's Principal Investment Strategies?
--------------------------------------------------------------------------------
The portfolio normally seeks to achieve its goal by investing at least 65%
of its total assets in equity securities of companies with large, mid and
small capitalizations that it selects on an opportunistic basis. The
portfolio is value oriented and the adviser seeks to identify statistically
undervalued companies where a catalyst exists to recognize value or improve
a company's profitability. These catalysts can be new management, industry
consolidation or company restructuring or a turn in the company's
fundamentals. Strong bottom up fundamental research, which focuses on both
quantitative and qualitative valuation measures drives the stock selection
process. The adviser's research team applies a broad range of quantitative
screens such as price to cash flow, low price to sales, low price to
earnings, low price to book value and quality of earnings. On a qualitative
basis, the adviser focuses on management strength, competitive position,
industry fundamentals and corporate strategy. As a result of its broader
definition of value, the adviser's valuation framework will include
companies valued by traditional statistical measures as well as relative
value, discount to asset break up value and special situations.
What are the Fund's Principal Risks?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks,
preferred stocks,
1
<PAGE>
convertible securities, rights and warrants. Equity securities may lose
value because of factors affecting the securities markets generally, such
as adverse changes in economic conditions, the general outlook of corporate
earnings, interest rates or investor sentiment. These circumstances may
lead to long periods of poor performance, such as during a "bear market."
Equity securities may also lose value because of factors affecting an
entire industry or sector, such as increases in production costs, or
factors directly related to a specific company, such as decisions made by
its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have
narrower product lines and more limited financial resources. Their stocks
may trade less frequently and in limited volume.
Undervalued companies may have experienced adverse business developments or
other events that have caused their stocks to be out of favor. If the
adviser's assessment of the company is wrong, or if the market does not
recognize the value of the company, the price of its stock may fail to meet
expectations and the portfolio's share price may suffer. A value-oriented
portfolio may not perform as well as certain other types of mutual funds
during periods when value stocks are out of favor.
How Has the Fund Performed?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares the average annual
returns of the fund to those of a broad-based securities market index.
Returns are based on past results and are not an indication of future
performance.
Calendar Year Returns
2000 1999 1998
[ ] 20.86% 7.41%
During the periods shown in the chart for the fund, the highest return for
a quarter was __.__% (quarter ending __/__/__) and the lowest return for a
quarter was __.__% (quarter ending __/__/__).
2
<PAGE>
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 11/4/97*
----------------------------------------------------------------
NWQ Special Equity Portfolio
----------------------------------------------------------------
S&P 500 Index
* Beginning of operations. Index comparisons began on 10/31/97
What are the Fund's Fees and Expenses?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
NWQ Special Equity
Portfolio
---------------------------------------------------------------------------
Management Fee 0.85%
---------------------------------------------------------------------------
Other Expenses+ 0.85%
---------------------------------------------------------------------------
Total Annual Fund Operating Expenses* 1.70%
* "Other Expense" presented in the table above may be higher than
the expenses you would actually pay as a shareholder in the fund.
This is due to the fact that "Other Expenses" do not take into
account any expense offset arrangement the portfolio may have
that would reduce its custodian fee based on the amount of cash
the portfolio maintains with its custodian. Such an arrangement
would have the effect of reducing the portfolio's expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
3
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with the fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept
third-party checks. You can add to an existing account by sending a check
and, if possible, the "Invest by Mail" stub that accompanied your statement
to the UAM Funds. Be sure your check identifies clearly your name, your
account number and the fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to
the UAM Funds. Finally, wire your money using the wiring instructions set
forth below. To add to an existing account by wire, call 1-877-826-5465 to
get a wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
4
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to
cancel or change it.
Minimum Investments
You can open an account with the fund with a minimum initial investment of
$2,500 ($500 for individual retirement accounts (IRAs) and $250 for Spousal
IRAs). You can buy additional shares for as little as $100.
Fund Codes
The fund's reference information, which is listed below, will be helpful to
you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
CUSIP Fund Code
---------------------------------------------------------------------------
902555333 916
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you
need more information.
5
<PAGE>
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you
must complete the appropriate sections of the account application and mail
it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login
-----------
information, including your personal identification number (PIN), please
call 1-877-826-5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial
institution. To participate in this service, you must complete the
appropriate sections of the account application and mail it to the UAM
Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in
proper form.
The UAM Funds may require that a bank or member firm of a national
securities exchange guarantee signatures. A notary public cannot guarantee
a signature. Signature guarantees are for the protection of shareholders.
Before they grant a redemption request, the UAM Funds may require a
shareholder to furnish additional legal documents to insure proper
authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check, bank check or money order.
6
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may
suspend your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
You can also exchange shares of the UAM Funds on the Internet at
www.uam.com. For login information, including your personal identification
-----------
number (PIN), please call 1-877-826-5465. Before exchanging your shares,
please read the prospectus of the UAM Fund for which you want to exchange.
You may obtain any UAM Fund prospectus by calling 1-877-826-5465. You may
only exchange shares between accounts with identical registrations (i.e.,
the same names and addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days
when the New York Stock Exchange is closed, the value of a UAM Fund may
change on days when you are unable to purchase or redeem shares.
7
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their
assets, subtracting their liabilities and then dividing the result by the
number of shares outstanding. The UAM Funds use current market prices to
value their investments. However, the UAM Funds may value investments at
fair value when market prices are not readily available or when events
occur that make established valuation methods (such as stock exchange
closing prices) unreliable. The UAM Funds will determine an investment's
fair value according to methods established by the Board. The UAM Funds
value debt securities that are purchased with remaining maturities of 60
days or less at amortized cost, which approximates market value. The UAM
Funds may use a pricing service to value some of their assets, such as debt
securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy or
sell shares at the NAV of any given day your financial intermediary must
receive your order before the close of trading on the New York Stock
Exchange that day. Your financial intermediary is responsible for
transmitting all purchase and redemption requests, investment information,
documentation and money to the UAM Funds on time. Your financial
intermediary may charge additional transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do
so, it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities
instead of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The UAM Funds will not
be responsible for any loss, liability, cost or expense for following
instructions received by telephone reasonably believed to be genuine.
8
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial investment.
This provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations
and not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, the fund distributes its net investment income and its net
capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of the fund
unless you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in the fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such
accounts may, however, be taxable at some time in the future. You should
always consult your tax advisor for specific guidance regarding the tax
effect of your investment in the UAM Funds.
Taxes on Distributions Distributions of the fund will generally be taxable
to shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time the fund held its
investments, not how long you held your shares. Dividends and distributions
of short-term capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as
long-term capital gains. Once a year UAM Funds will send you a statement
showing the types and total amount of distributions you received during the
previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In
this case, you would be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of your investment. This is known as "buying a
dividend" and should be avoided.
9
<PAGE>
The fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received
deduction, subject to certain holding period requirements and financing
limitations.
If the fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the fund received
from sources in foreign countries. The fund may elect to treat some of
those taxes as a distribution to shareholders, which would allow
shareholders to offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in
the fund, you may recognize a capital gain or loss for federal tax
purposes. This gain or loss will be based on the difference between the
cost of your shares (tax basis) and the amount you receive for them. To aid
in computing your tax basis, you should keep your account statements for
the periods during which you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you
realize on shares held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain
distributions you received on the shares.
Backup Withholding By law, the fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct
taxpayer information, (ii) to properly include on your return payments of
taxable interest or dividends, or (iii) to certify to the fund that you are
not subject to back-up withholding when required to do so or that you are
an "exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of
distributions that are attributable to interest on federal securities. As
mentioned above, you should always consult your tax advisor for specific
guidance regarding the tax effect of your investment in the fund.
10
<PAGE>
Additional Information about the Fund
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, the fund may use the
investment strategies described below. The fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of the fund's investment practices and its risks, you should read the
SAI.
Derivatives
The fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify the fund's gains or losses. There are various factors that
affect the fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives the
fund buys or sells. The fund could be negatively affected if the change in
market value of its securities fails to correlate perfectly with the values
of the derivatives it purchased or sold.
Short-Term Investing
At times, the adviser may decide to invest up to 100% of the fund's assets
in a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities
for temporary defensive purposes, to earn a return on uninvested assets or
to meet redemptions. The adviser may temporarily adopt a defensive position
to reduce changes in the value of the shares of the fund that may result
from adverse market, economic, political or other developments. When the
adviser pursues a temporary defensive strategy, the fund may not profit
from favorable developments that it would have otherwise profited from if
it were pursuing its normal strategies. Likewise, these strategies may
prevent the fund from achieving its stated objectives.
11
<PAGE>
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
NWQ Investment Management Company, Inc., a Massachusetts corporation
located at 2049 Century Park East, 4/th/ Floor, Los Angeles, California
90067, is the fund's investment adviser. The adviser manages and supervises
the investment of the fund's assets on a discretionary basis. The adviser
has provided investment management services to institutions and high net
worth individuals since 1982.
During it most recent fiscal year, the portfolio paid [ %] in management
fees to its adviser, expressed as a percentage of average net assets. In
addition, the adviser has voluntarily agreed to limit the total expenses
(excluding interest, taxed, brokerage commissions and extraordinary
expenses) of this class of portfolio to 1.25%, also expressed as a
percentage of average net assets. To maintain this expense limit, the
adviser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. The adviser intends to continue its expense
limitation until further notice, but may discontinue it at any time.
Portfolio Managers
Jon D. Bosse, CFA, is the Portfolio Manager of the fund. Mr. Bosse has been
a Managing Director of the adviser since 1996. From 1986 to 1996, Mr. Bosse
was a Portfolio Manager and Director of Equity Research at ARCO Investment
Management Company.
Adviser's Historical Performance
The adviser manages separate accounts that have the same investment
objectives as the fund. The adviser manages these accounts using techniques
and strategies substantially similar, though not always identical, to those
used to manage the fund. A composite of the performance of these separate
accounts is listed below. To be included in the composite, the account had
to be fully discretionary, tax-free, have assets of at least $2 million and
beginning January 1, 1997, under the adviser's management for at least 60
days prior to the beginning of a calendar quarter. The composite does not
include any wrap accounts or other similar accounts managed by the adviser
where clients are charged a single fee in excess of 0.40% by another
financial institution for brokerage, custody, consulting, reporting,
performance monitoring and adviser selection services because of the
difficulty in segregating charges related to transaction costs from charges
for custody, consulting, reporting, performance monitoring and adviser
selection services. Non-wrap accounts included in the composite have
transaction costs less than 0.40%, which the adviser believes is more
reflective of the charges related to the adviser's management of an
account. Wrap accounts may have fees as high as 3.00%, which cover services
like custody, consulting, reporting, performance monitoring, brokerage and
adviser selection services that are provided by the
12
<PAGE>
wrap program sponsor and not the investment adviser. Consequently, the
performance below would be reduced if such wrap fees were reflected.
The performance data for the managed accounts reflects deductions for
investment management fees and transaction costs on an individual account
basis. However, any fees an individual account paid to a custodian were not
deducted. All fees and transaction costs of the separate accounts were less
than the operating expenses of the fund. If the performance of the managed
accounts were adjusted to reflect the fees and expenses of the fund, the
composite's performance would have been lower. The performance data also
reflects the reinvestment of dividends, income and capital appreciation.
The adviser calculated its performance based on a time-weighted and
asset-weighted total rate of return. Time-weighting is a method of
calculating the performance of each account in the composite that is
designed to remove the effect of any cash additions to, or withdrawals
from, the account. Asset-weighting means that larger accounts will have a
proportionately greater rate of impact on the composite's rate of return
than smaller accounts. The SEC standardized average annual total return in
neither time-weighted or asset-weighted and is determined for specified
periods by computing the annualized percentage change in the value of the
initial amount that is invested in a share class of the portfolio at the
maximum public offering price. Had the adviser calculated its performance
using the SEC's methods for investment companies, its results might have
differed.
The separately managed accounts are not subject to investment limitations,
diversification requirements, and other restrictions imposed by the
Investment Company Act of 1940 and the Internal Revenue Code. If they were,
their returns might have been lower. The performance of these separate
accounts is not intended to predict or suggest the performance of the
portfolio.
<TABLE>
<CAPTION>
NWQ
Investment
Management
Company-- Lipper Mid Cap
Special Equity S&P 400 Mid Value Funds
Composite + S&P 500 Index # Cap Index # Index #
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Calendar Years Ended:
----------------------------------------------------------------------------------------
1997 35.48% 33.36% 32.25% 22.66%
----------------------------------------------------------------------------------------
1998 7.89% 28.58% 19.12% -1.72%
----------------------------------------------------------------------------------------
1999 16.30% 21.04% 14.72% 11.94%
----------------------------------------------------------------------------------------
2000 % % % %
----------------------------------------------------------------------------------------
Average Annual Returns for Periods Ended 12/31/00
1-year % % % %
----------------------------------------------------------------------------------------
3 Years % % % %
----------------------------------------------------------------------------------------
Since inception
(10/1/96) % % % %
----------------------------------------------------------------------------------------
Cumulative Since % % % %
Inception
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Investment
Management
Company-- Lipper Mid Cap
Special Equity S&P 400 Mid Value Funds
Composite + S&P 500 Index # Cap Index # Index #
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(10/1/96)
</TABLE>
+ The adviser's imputed average annual investment management fee from
10/1/96 to 12/31/00 was approximately ___% based on the fees paid by the
adviser's special equity accounts included in the composite. Net returns
to investors may vary depending on the investment management fee, which
may be a maximum of 0.85%. The adviser's composite has not been audited.
# Lipper Mid Cap Value Funds Index, S&P 500 Index and S&P 400 Mid Cap
Index comparisons begin on 9/30/96.
Historical Performance of Jon Bosse
While at ARCO Investment Management Company, Mr. Bosse managed a separate
account using techniques and strategies substantially similar, though not
always identical, to those used to manage the NWQ Special Equity Portfolio.
Set forth below is certain performance information that the adviser
provided concerning Mr. Bosse's account. The performance data for this
account reflects deduction of the adviser's maximum special equity account
investment management fee and transaction costs. However, custodial fees
were not deducted. Because this account had different fees and expenses
than the fund, its investment returns may differ from those of the fund.
All fees and transaction costs of the separate account were less than the
operating expense of the fund. If the performance of Mr. Bosse's account
were adjusted to reflect fees and expenses of the fund, its performance
would have been lower. The performance of Mr. Bosse's account also reflects
the reinvestment of dividends, income and capital appreciation. During Mr.
Bosse's tenure as portfolio manager for the separately managed account, he
was primarily responsible for the day-to-day management of the assets, and
no other person had a significant role in achieving the separately managed
account's performance.
The adviser calculated Mr. Bosse's performance based on a time-weighted
total rate of return. (See the description of the adviser's performance
above for an explanation of time-weighting.) The SEC standardized average
annual total return is neither time-weighted nor asset-weighted and is
determined for specified periods by computing the annualized percentage of
change in the value of the initial amount that is invested in a share class
of the fund at the maximum public offering price. Had the adviser
calculated Mr. Bosse's performance using the SEC's methods for investment
companies, its results might have differed.
The separately managed account is not subject to investment limitations,
diversification requirements, and other restrictions imposed by the
Investment Company Act of 1940 and the Internal Revenue Code. If the
14
<PAGE>
separately managed account were, its returns might have been lower. The
performance of this separate account is not intended to predict or suggest
the performance of the fund.
<TABLE>
<CAPTION>
Lipper Mid
ARCO Value S&P 500 Index S&P 400 Mid Cap Funds
Equity Fund* # Cap Index # Index #
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Calendar Years Ended:
1990 0.74% -3.10% -5.13% -4.49%
-------------------------------------------------------------------------------
1991 53.57% 30.47% 50.10% 54.02%
-------------------------------------------------------------------------------
1992 30.25% 7.62% 11.91% 8.61%
-------------------------------------------------------------------------------
1993 19.71% 10.08% 13.95% 15.36%
-------------------------------------------------------------------------------
1994 8.59% 1.32% -3.58% -2.02%
-------------------------------------------------------------------------------
1995 38.54% 37.58% 30.94% 33.08%
-------------------------------------------------------------------------------
1996* 8.29% 7.45% 7.70% 8.30%
Annualized Return For Various Periods Ended 8/31/96 (annualized)
1-year 15.46% 18.73% 11.88% 13.65%
-------------------------------------------------------------------------------
5 Years 22.90% 13.59% 14.18% 14.66%
-------------------------------------------------------------------------------
Since inception
(1/1/90) 22.80% 12.88% 14.52% 15.43%
-------------------------------------------------------------------------------
Cumulative Since
Inception (1/1/90) 293.30% 124.31% 146.92% 160.30%
</TABLE>
* Through 8/31/96. This figure is not an annualized return.
# Lipper Mid Cap Funds Index, S&P Index and S&P Mid Cap 400 Index
comparisons begin on 12/31/89.
Shareholder Servicing Arrangements
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial
representatives may receive compensation from the fund or its service
providers for providing a variety of services. This section briefly
describes how the financial representatives may get paid.
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of the fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with the
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of the fund or for servicing
your account. Your financial representative should provide you with a
schedule of its fees and services.
The fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure
that the fees paid are appropriate for the services performed. The fund
does not pay these service fees on shares purchased directly. In addition,
the adviser and its affiliates may, at their own expense, pay financial
representatives for these services.
15
<PAGE>
UAM Fund Distributors, Inc., the fund's principal underwriter, may
participate in arrangements with selling dealers where the selling dealer
waives its right to distribution or shareholder servicing fees for selling
fund shares or servicing shareholder accounts. These arrangements typically
are intended to avoid duplicate payment of fees where the selling dealers
transactions are through an omnibus account with a different clearing
broker, and that broker is entitled to receive distribution and/or
servicing fee from the fund.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to the fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to the fund.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
financial performance of the fund for the fiscal periods indicated. Certain
information contained in the table reflects the financial results for a
single share. The total returns in the table represent the rate that an
investor would have earned on an investment in the fund assuming all
dividends and distributions were reinvested. PricewaterhouseCoopers LLP has
audited this information. The financial statements and the unqualified
opinion of PricewaterhouseCoopers LLP are included in the annual report of
the fund, which is available upon request by calling the UAM Funds at
1-877-826-5465.
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998#
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.01 $ 10.00
Income from Investment Operations:
Net Investment Income 0.03 0.02
Net Realized and Unrealized Gain (Loss) 1.88 (0.01)+
Total From Investment Operations 1.91 0.01
Distributions:
Net Investment Income (0.03) -
Net Realized Gain (0.05) -
Total Distributions (0.08) -
Net Asset Value, End of Period $ 11.84 $ 10.01
Total Return+/- 19.33% 0.10%@
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $16,406 $ 14,167
Ratio of Expenses to Average Net Assets 1.22 1.16%*
Ratio of Net Investment Income to
Average Net Assets 0.26% 0.42%*
Portfolio Turnover Rate 26% 23%
</TABLE>
# For the period from November 4, 1997 (commencement of operations) to
October 31, 1998.
* Annualized
@ Not annualized
+ The amount shown for a share outstanding throughout the period does not
accord with the aggregate net gains on investments for that period
because of the sales and repurchases of portfolio shares in relation to
fluctuating market value of investments of the portfolio.
+/-Total return would have been lower had certain fees not been waived and
certain expenses not been assumed by the adviser during the periods
indicated.
17
<PAGE>
NWQ Special Equity Portfolio
Investors who want more information about the fund should read the fund's
annual/semi-annual reports and the fund's statement of additional
information. The annual/semi-annual reports of the fund provide additional
information about its investments. In the annual report, you will also find
a discussion of the market conditions and investment strategies that
significantly affected the performance of the fund during the last fiscal
year. The statement of additional information contains additional detailed
information about the fund and is incorporated by reference into (legally
part of) this prospectus.
Investors can receive free copies of the statement of additional
information, shareholder reports and other information about the UAM Funds
and can make shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about the fund (including the statement
of additional information) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get information on the
operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-202-942-8090. Reports and other information about
the fund are available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov. You may obtain copies of
------------------
this information, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
------------------
Securities and Exchange Commission's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
[LOGO OF UAM] (R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
The Rice, Hall James Portfolios
Institutional Class Shares Prospectus March 1, 2001
Rice, Hall James Small Cap Portfolio
Rice, Hall James Small/Mid Cap Portfolio
[LOGO OF UAM] (R)
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Rice, Hall James Small Cap Portfolio.......................................... 1
What are the Fund's Objectives?............................................ 1
What are the Fund's Principal Investment Strategies?....................... 1
What are the Fund's Principal Risks?....................................... 2
How has the Fund Performed?................................................ 2
What are the Fund's Fees and Expenses?..................................... 3
Rice, Hall James Small/Mid Cap Portfolio...................................... 5
What are the Fund's Objectives?............................................ 5
What are the Fund's Principal Investment Strategies?....................... 5
What are the Fund's Principal Risks?....................................... 6
How has the Fund Performed?................................................ 6
What are the Fund's Fees and Expenses?..................................... 7
Investing with the UAM Funds.................................................. 9
Buying Shares.............................................................. 9
Redeeming Shares........................................................... 10
Exchanging Shares.......................................................... 12
Transaction Policies....................................................... 12
Account Policies........................................................... 14
Additional Information about the Funds........................................ 16
Other Investment Practices and Strategies.................................. 16
Investment Management...................................................... 17
Shareholder Servicing Arrangements......................................... 18
Financial Highlights.......................................................... 19
Rice, Hall James Small Cap Portfolio....................................... 19
Rice, Hall James SMall/Mid Cap Portfolio................................... 20
</TABLE>
<PAGE>
R H J Portfolios Prospectus
Rice, Hall James Small Cap Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Small Cap Portfolio seeks maximum capital appreciation, consistent with
reasonable risk to principal by investing primarily in small market
capitalization companies. The fund may not change its objective without
shareholder approval.
WHAT ARE THE fUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Small Cap Portfolio normally seeks to achieve its objective by
investing at least 65% of its total assets in equity securities of
companies with market capitalizations of $40 million to $500 million at the
time of initial purchase. In selecting securities for the fund, the adviser
emphasizes smaller, emerging companies possessing the potential to become
market leaders in their industries.
The adviser uses a company specific approach to making investment
decisions, which focuses on identifying stocks of growth companies that are
selling at a discount to the companies' projected earnings growth rates.
Specifically, the adviser will only invest the assets of the fund in
companies with price/earnings ratios that are lower than the company's 3 to
5 year projected earnings growth rate.
The adviser looks for companies where fundamental changes are occurring
that are temporarily going unnoticed by investors, but which it believes
will ultimately lead to increases in revenue growth rates, expanding profit
margins and/or increases in earnings growth rates. Such events can include
new product introductions or applications, discovery of niche markets, new
management, corporate or industry restructures, regulatory change and
market expansion. Most importantly, the fund typically invests in a company
only when the adviser believes that such changes will lead to greater
investor recognition and higher stock prices within a 12- to 24-month
period.
Moreover, the adviser will focus on securities of companies with:
. Strong management.
. Leading products or services.
. Distribution to a large marketplace or growing niche market.
. Anticipated above-average revenue and earnings growth rates.
. Potential for improvement in profit margins.
. Strong cash flow and/or improving financial position.
1
<PAGE>
The fund does not sell stocks simply because they are no longer within the
capitalization range used for the initial purchase. However, it may sell
stocks for the following reasons:
. The stock reaches the target price set by the adviser.
. The stock falls below the downside price limit set by the adviser.
. The fundamentals of the stock have deteriorated.
. A more attractively valued alternative is available for purchase.
The adviser expects that cash reserves will normally represent a small
portion of the fund's assets (under 20%).
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have
narrower product lines and more limited financial resources. Their stocks
may trade less frequently and in limited volume.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares average annual returns
the fund to those of a broad-based securities market index. Returns are
based on past results and are not an indication of future performance.
2
<PAGE>
Calendar Year Returns
[GRAPH APPEARS HERE]
During the periods shown in the chart for the fund, the highest return for
a quarter was __.__% (quarter ending __/__/__) and the lowest return for a
quarter was __.__% (quarter ending __/__/__).
Average Annual Returns For Periods Ended December 31, 2000
<TABLE>
<CAPTION>
1 Year 5 Years Since 7/1/94*
===========================================================================
<S> <C> <C> <C>
Small Cap Portfolio
---------------------------------------------------------------------------
Russell 2000 Index
</TABLE>
* Beginning of operations. Index comparisons begin on June 30, 1994.
What are the Fund's Fees and Expenses?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fee 0.75%
---------------------------------------------------------------------------
Other Expenses* _.__%
---------------------------------------------------------------------------
* -Other Expenses presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because
the adviser has voluntarily agreed to limit the expenses of the fund
to the extent necessary to keep its total expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses)
from exceeding 1.40% of its average daily net assets. The adviser may
change or cancel its Expenses limitation at any time. In addition,-
Other Expenses do not take into account any expense offset arrangement
the fund may have that would reduce its custodian fee
3
<PAGE>
based on the amount of cash the fund maintains with its custodian.
This would also have the effect of reducing the funds expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
4
<PAGE>
RICE, HALL JAMES SMALL/MID CAP PORTFOLIO
What are the Fund's Objectives?
--------------------------------------------------------------------------------
The Small/Mid Cap Portfolio seeks maximum capital appreciation, consistent
with reasonable risk to principal by investing primarily in small/mid
market capitalization (small/mid cap) companies. [The fund may change its
objective without shareholder approval.]
What are the Fund's Principal Investment Strategies?
--------------------------------------------------------------------------------
The Small/Mid Cap Portfolio normally seeks to achieve its objective by
investing at least 65% of its total assets in equity securities of
companies with market capitalizations of $300 million to $2.5 billion at
the time of initial purchase. The small/mid cap range of the market
(meaning companies with market capitalizations of less than $2.5 billion
but greater than $300 million) has more than three times the number of
securities than the market comprised of companies with market
capitalizations greater than $2.5 billion. The adviser believes that there
are greater pricing inefficiencies for small/mid cap securities than larger
capitalization securities because this range of the market has less analyst
coverage.
The adviser uses a company specific approach to making investment
decisions, which focuses on identifying stocks of growth companies that are
selling at a discount to the companies' projected earnings growth rates.
Specifically, the adviser will only invest the assets of the fund in
companies with price/earnings ratios that are lower than the company's 3 to
5 year projected earnings growth rate.
The adviser looks for companies where fundamental changes are occurring
that are temporarily going unnoticed by investors, but which it believes
will ultimately lead to increases in revenue growth rates, expanding profit
margins and/or increases in earnings growth rates. Such events can include
new product introductions or applications, discovery of niche markets, new
management, corporate or industry restructures, regulatory change and
market expansion. Most importantly, the fund typically invests in a company
only when the adviser believes that such changes will lead to greater
investor recognition and higher stock prices within a 12- to 24-month
period.
Moreover, the adviser will focus on securities of companies with:
. Strong management.
. Leading products or services.
. Distribution to a large marketplace or growing niche market.
. Anticipated above-average revenue and earnings growth rates.
5
<PAGE>
. Potential for improvement in profit margins.
. Strong cash flow and/or improving financial position.
The fund does not sell stocks simply because they are no longer within the
capitalization range used for the initial purchase. However, it may sell
stocks for the following reasons:
. The stock reaches the target price set by the adviser.
. The stock falls below the downside price limit set by the adviser.
. The fundamentals of the stock have deteriorated.
. A more attractively valued alternative is available for purchase.
The adviser expects that cash reserves will normally represent a small
portion of the funds assets (under 20%).
What are the Fund's Principal Risks?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The funds
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect a value of the funds
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have
narrower product lines and more limited financial resources. Their stocks
may trade less frequently and in limited volume.
How Has the Fund Performed?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to
6
<PAGE>
year. The average annual return table compares average annual returns the
fund to those of a broad-based securities market index. Returns are based
on past results and are not an indication of future performance.
Calendar Year Returns
[GRAPH APPEARS HERE]
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a
quarter was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31, 2000
1 Year Since 11/1/96*
----------------------------------------------------------------------------
Small/Mid Cap Portfolio
----------------------------------------------------------------------------
Russell 2000 Index
----------------------------------------------------------------------------
Russell Mid-Cap Index
----------------------------------------------------------------------------
50/50 Blended Russell Index (50% Russell 2000 Index and
50% Russell Mid-Cap Index)
* Beginning of operations. Index comparisons begin on October 31, 1996.
What are the Fund's Fees and Expenses?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.80%
Other Expenses* _.__%
===========================================================================
Total Annual Fund Operating Expenses* _.__%
* -Other Expenses presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because
the adviser has voluntarily
7
<PAGE>
agreed to limit the expenses of the fund to the extent necessary to
keep its total expenses (excluding interest, taxes, brokerage
commissions and extraordinary expenses) from exceeding 1.25% of its
average daily net assets. The adviser may change or cancel its expense
limitation at any time. In addition, Other Expenses do not take into
account any expense offset arrangement the fund may have that would
reduce its custodian fee based on the amount of cash the fund
maintains with its custodian. This would also have the effect of
reducing the funds expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
8
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with a fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept third-
party checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the
UAM Funds. Be sure your check identifies clearly your name, your account
number and a fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to
the UAM Funds. Finally, wire your money using the wiring instructions set
forth below. To add to an existing account by wire, call 1-877-826-5465 to
get a wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
9
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to
cancel or change it.
Minimum Investments
You can open an account with either fund with a minimum initial investment
of $2,500 ($500 for individual retirement accounts (IRAs) and $250 for
Spousal IRAs). You can buy additional shares for as little as $100.
Fund Codes
Each fund's reference information, which is listed below, will be helpful
to you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
Fund Name Trading Symbol CUSIP Fund Code
-------------------------------------------------------------------------
Small Cap Portfolio RHJSX 902555671 638
-------------------------------------------- ----------------------------
Small/Mid Cap Portfolio RHJMX 902555440 639
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and by increasing expenses.)
Redeeming Shares
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you
need more information.
10
<PAGE>
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you
must complete the appropriate sections of the account application and mail
it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login
-----------
information, including your personal identification number (PIN), please
call 1-877-826-5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial
institution. To participate in this service, you must complete the
appropriate sections of the account application and mail it to the UAM
Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in
proper form.
The UAM Funds may require that a bank or member firm of a national
securities exchange guarantee signatures. A notary public cannot guarantee
a signature. Signature guarantees are for the protection of shareholders.
Before they grant a redemption request, the UAM Funds may require a
shareholder to furnish additional legal documents to insure proper
authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check, bank check or money order.
11
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may
suspend your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
Exchanging Shares
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
You can also exchange shares of the UAM Funds on the Internet at
www.uam.com. For login information, including your personal identification
-----------
number (PIN), please call 1-877-826-5465. Before exchanging your shares,
please read the prospectus of the UAM Fund for which you want to exchange.
You may obtain any UAM Fund prospectus by calling 1-877-826-5465. You may
only exchange shares between accounts with identical registrations (i.e.,
the same names and addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
Transaction Policies
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days
when the New York Stock Exchange is closed, the value of a UAM Fund may
change on days when you are unable to purchase or redeem shares.
12
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their
assets, subtracting their liabilities and then dividing the result by the
number of shares outstanding. The UAM Funds use current market prices to
value their investments. However, the UAM Funds may value investments at
fair value when market prices are not readily available or when events
occur that make established valuation methods (such as stock exchange
closing prices) unreliable. The UAM Funds will determine an investment's
fair value according to methods established by the Board. The UAM Funds
value debt securities that are purchased with remaining maturities of 60
days or less at amortized cost, which approximates market value. The UAM
Funds may use a pricing service to value some of their assets, such as debt
securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy or
sell shares at the NAV of any given day your financial intermediary must
receive your order before the close of trading on the New York Stock
Exchange that day. Your financial intermediary is responsible for
transmitting all purchase and redemption requests, investment information,
documentation and money to the UAM Funds on time. Your financial
intermediary may charge additional transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do
so, it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities
instead of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The UAM Funds will not
be responsible for any loss, liability, cost or expense for following
instructions received by telephone reasonably believed to be genuine.
13
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial investment.
This provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations
and not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, each fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of a fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in a fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such
accounts may, however, be taxable at some time in the future. You should
always consult your tax advisor for specific guidance regarding the tax
effect of your investment in the UAM Funds.
Taxes on Distributions Distributions of a fund will generally be taxable to
shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time a fund held its
investments, not how long you held your shares. Dividends and distributions
of short-tem capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as long-
term capital gains. Once a year UAM Funds will send you a statement showing
the types and total amount of distributions you received during the
previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In
this case, you would be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of your investment. This is known as "buying a
dividend" and should be avoided.
14
<PAGE>
A fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received
deduction, subject to certain holding period requirements and financing
limitations.
If a fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received
from sources in foreign countries. A fund may elect to treat some of those
taxes as a distribution to shareholders, which would allow shareholders to
offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in a
fund, you may recognize a capital gain or loss for federal tax purposes.
This gain or loss will be based on the difference between the cost of your
shares (tax basis) and the amount you receive for them. To aid in computing
your tax basis, you should keep your account statements for the periods
during which you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you
realize on shares held for six months or less will be treated as a long-
term capital loss to the extent of any long-term capital gain distributions
you received on the shares.
Backup Withholding By law, a fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct
taxpayer information, (ii) to properly include on your return payments of
taxable interest or dividends, or (iii) to certify to the fund that you are
not subject to back-up withholding when required to do so or that you are
an "exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of
distributions that are attributable to interest on federal securities. As
mentioned above, you should always consult your tax advisor for specific
guidance regarding the tax effect of your investment in a fund.
15
<PAGE>
Additional Information about the Funds
OTHER INVESTMENT PRACTICES AND STRATEGIES
------------------------------------------------------------------------------
In addition to its principal investment strategies, each fund may use the
investment strategies described below. Each fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of a fund's investment practices and its risks, you should read the
SAI.
Derivatives
A fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify a fund's gains or losses. There are various factors that
affect a fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives a fund
buys or sells. A fund could be negatively affected if the change in market
value of its securities fails to correlate perfectly with the values of the
derivatives it purchased or sold.
Foreign Securities
A fund may invest in securities of companies located outside of the United
States, American Depositary Receipts, European Depositary Receipts and
other similar global instruments. When a fund invests in foreign
securities, it will be subject to risks not typically associated with
domestic securities. Foreign investments, especially those of companies in
emerging markets, can be riskier and more volatile than investments in the
United States. Adverse political and economic developments or changes in
the value of foreign currency can make it harder for a fund to sell its
securities and could reduce the value of your shares. Differences in tax
and accounting standards and difficulties in obtaining information about
foreign companies can negatively affect investment decisions. Unlike more
established markets, emerging markets may have governments that are less
stable, markets that are less liquid and economies that are less
developed.
16
<PAGE>
Short-Term Investing
At times, the adviser may decide to invest up to 100% of a fund's assets in
a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities
for temporary defensive purposes, to earn a return on uninvested assets or
to meet redemptions. The adviser may temporarily adopt a defensive position
to reduce changes in the value of the shares of a fund that may result from
adverse market, economic, political or other developments. When the adviser
pursues a temporary defensive strategy, a fund may not profit from
favorable developments that it would have otherwise profited from if it
were pursuing its normal strategies. Likewise, these strategies may prevent
a fund from achieving its stated objectives.
Portfolio Turnover
A fund may buy and sell investments relatively often. Such a strategy often
involves higher expenses, including brokerage commissions, and may increase
the amount of capital gains (and, in particular, short-term gains) realized
by the fund. Shareholders must pay tax on such capital gains.
INVESTMENT MANAGEMENT
------------------------------------------------------------------------------
Investment Adviser
Rice, Hall, James & Associates, a California corporation located at 600
West Broadway, Suite 1000, San Diego, CA 92101, is each fund's investment
adviser. The adviser manages and supervises the investment of each fund's
assets on a discretionary basis. The adviser has provided investment
management services to individual and institutional investors since 1974.
Set forth in the table below are the management fees the portfolios paid to
the adviser during the their most recent fiscal year, expressed as a
percentage of average net assets. In addition, the adviser has voluntarily
agreed to limit the total expenses (excluding interest, taxes, brokerage
commissions and extraordinary expenses) of some or all of the portfolios to
the amounts listed in the table below. To maintain these expense limits,
the adviser may waive a portion of its management fee and/or reimburse
certain expenses of the portfolios. The adviser intends to continue its
expense limitation until further notice, but may discontinue it at any
time.
<TABLE>
<CAPTION>
Small Cap Portfolio Small/Mid Cap Portfolio
-------------------------------------------------------------------------------
<S> <C> <C>
Management Fee
-------------------------------------------------------------------------------
Expense Limit 1.40% 1.25%
</TABLE>
Portfolio Managers
A team of the adviser's investment professionals has primary responsibility
for the day-to-day management of each fund.
17
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial
representatives may receive compensation from a fund or its service
providers for providing a variety of services. This section briefly
describes how the financial representatives may get paid.
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of a fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with a
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of a fund or for servicing your
account. Your financial representative should provide you with a schedule
of its fees and services.
A fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure
that the fees paid are appropriate for the services performed. A fund does
not pay these service fees on shares purchased directly. In addition, the
adviser and its affiliates may, at their own expense, pay financial
representatives for these services.
UAM Fund Distributors Inc., the fund's principal underwriter may
participate in arrangements with selling dealers where the selling dealer
waives its right to distribution of shareholder servicing fees for selling
fund shares or servicing shareholder accounts. These arrangements typically
are intended to avoid duplicate payment of fees, where the selling dealer's
transactions are through an omnibus account with a different clearing
broker, and that broker is entitled to receive distribution and/or
servicing fees from the fund.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to a fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to a fund.
18
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of each fund for the past five years. Certain
information contained in the table reflects the financial results for a
single share. The total returns in the table represent the rate that an
investor would have earned on an investment in each fund assuming all
dividends and distributions were reinvested. PricewaterhouseCoopers LLP has
audited this information. The financial statements and the unqualified
opinion of PricewaterhouseCoopers LLP are included in the annual report of
the funds, which is available upon request by calling the UAM Funds at 1-
877-826-5465.
RICE, HALL JAMES SMALL CAP PORTFOLIO
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 12.94 $ 18.76 $ 15.73 $ 15.87
Income from Investment
Operations:
Net Investment Income (0.03) (0.06) (0.08) (0.10)
Net Realized and Unrealized Gain
(Loss) 3.15 (3.47) 4.59 2.73
Total From Investment
Operations 3.12 (3.53) 4.51 2.63
Distributions:
Net Investment Income -- -- -- --
In Excess of Net Investment
Income -- -- -- --
Net Realized Gain -- (2.29) (1.48) (2.77)
Total Distributions -- (2.29) (1.48) (2.77)
Net Asset Value, End of Period $ 16.06 $ 12.94 $ 18.76 $ 15.73
Total Return 24.21 % (20.86)% 31.44 % 19.43 %
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $48,399 $ 42,219 $ 51,772 $ 33,488
Ratio of Expenses to Average
Net Assets 1.29 % 1.16 % 1.21 % 1.37 %
Ratio of Net Investment Income
to Average Net Assets (0.67)% (0.48)% (0.53)% (0.78)%
Portfolio Turnover Rate 132 % 120 % 158 % 181 %
</TABLE>
19
<PAGE>
RICE, HALL JAMES SMALL/MID CAP PORTFOLIO
------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997#
-------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $ 12.89 $ 12.64 $ 10.00
Income from Investment
Operations:
Net Investment Income (0.05) (0.01) 0.03
Net Realized and Unrealized
Gain (Loss) 0.22 0.42 2.64
Total From Investment
Operations 0.17 0.41 2.67
Distributions: (0.00)
Net Investment Income -- @ (0.03)
Net Realized Gain (0.17) (0.16) --
Total Distributions (0.17) (0.16) (0.03)
Net Asset Value, End of Period $ 12.89 $ 12.89 $ 12.64
Total Return+ 1.31 % 3.33 % 26.76 %
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $20,231 $21,780 $12,957
Ratio of Expenses to Average
Net Assets 1.25 % 1.25 % 1.25 %
Ratio of Net Investment Income
to Average Net Assets (0.47)% (0.12)% 0.24 %
Portfolio Turnover Rate 78 % 83 % 56 %
# For the period from November 1, 1996 (commencement of operations) to
October 31, 1997.
+ Total return would have been different had certain fees not been waived
and certain expenses not been assumed by the adviser during the periods
indicated.
@ Value is less than $0.01 per share.
20
<PAGE>
The Rice, Hall James Portfolios
Investors who want more information about a fund should read the fund's
annual/semi-annual reports and the funds' statement of additional
information. The annual/semi-annual reports of a fund provide additional
information about its investments. In the annual report, you will also find
a discussion of the market conditions and investment strategies that
significantly affected the performance of each fund during the last fiscal
year. The statement of additional information contains additional detailed
information about the funds' and is incorporated by reference into (legally
part of) this prospectus.
Investors can receive free copies of the statement of additional
information, shareholder reports and other information about the UAM Funds
and can make shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about a fund (including the statement
of additional information) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get information on the
operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-202-942-8090. Reports and other information about
a fund are available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov. You may obtain copies of
------------------
this information, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
------------------
Securities and Exchange Commission's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
UAM (R)
<PAGE>
UAM Funds
Funds for the Informed Investor/SM/
The Sirach Portfolios
Institutional Class Shares Prospectus March 1, 2001
Sirach Growth Portfolio
Sirach Equity Portfolio
Sirach Special Equity Portfolio
Sirach Strategic Balanced Portfolio
Sirach Bond Portfolio
[UAM](R)
The Security and Exchange Commission has not approved or disapproved these
Securities or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SIRACH GROWTH PORTFOLIO....................................................... 1
WHAT ARE THE FUND'S OBJECTIVES?............................................ 1
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?....................... 1
WHAT ARE THE FUND'S PRINCIPAL RISKS?....................................... 1
HOW HAS THE FUND PERFORMED?................................................ 2
WHAT ARE THE FUND'S FEES AND EXPENSES?..................................... 3
SIRACH EQUITY PORTFOLIO....................................................... 4
WHAT ARE THE FUND'S OBJECTIVES?............................................ 4
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?....................... 4
WHAT ARE THE FUND'S PRINCIPAL RISKS?....................................... 4
HOW HAS THE FUND PERFORMED?................................................ 5
WHAT ARE THE FUND'S FEES AND EXPENSES?..................................... 5
SIRACH SPECIAL EQUITY PORTFOLIO............................................... 7
WHAT ARE THE FUND'S OBJECTIVES?............................................ 7
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?....................... 7
WHAT ARE THE FUND'S PRINCIPAL RISKS?....................................... 7
HOW HAS THE FUND PERFORMED?................................................ 8
WHAT ARE THE FUND'S FEES AND EXPENSES?..................................... 9
SIRACH BOND PORTFOLIO......................................................... 10
WHAT ARE THE FUND'S OBJECTIVES?............................................ 10
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?....................... 10
WHAT ARE THE FUND'S PRINCIPAL RISKS?....................................... 11
HOW HJAS THE FUND PERFORMED?............................................... 11
WHAT ARE THE FUND'S FEES AND EXPENSES?..................................... 12
SIRACH STRATEGIC BALANCED PORTFOLIO........................................... 13
WHAT ARE THE FUND'S OBJECTIVES?............................................ 13
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?....................... 13
WHAT ARE THE FUND'S PRINCIPAL RISKS?....................................... 13
HOW HAS THE FUND PERFORMED?................................................ 14
WHAT ARE THE FUND'S FEES AND EXPENSES?..................................... 14
INVESTING WITH THE UAM FUNDS.................................................. 16
BUYING SHARES.............................................................. 16
REDEEMING SHARES........................................................... 17
EXCHANGING SHARES.......................................................... 19
TRANSACTION POLICIES....................................................... 19
ACCOUNT POLICIES........................................................... 21
ADDITIONAL INFORMATION ABOUT THE FUNDS........................................ 23
</TABLE>
<PAGE>
<TABLE>
<S> <C>
OTHER INVESTMENT PRACTICES AND STRATEGIES.................................. 23
INVESTMENT MANAGEMENT...................................................... 24
SHAREHOLDER SERVICING ARRANGEMENTS......................................... 25
ADDITIONAL CLASSES......................................................... 25
FINANCIAL HIGHLIGHTS.......................................................... 26
SIRACH GROWTH PORTFOLIO.................................................... 26
SIRACH EQUITY PORTFOLIO.................................................... 27
SIRACH SPECIAL EQUITY PORTFOLIO............................................ 28
SIRACH BOND PORTFOLIO...................................................... 29
SIRACH STRATEGIC BALANCED PORTFOLIO........................................ 30
</TABLE>
<PAGE>
Sirach Growth Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Sirach Growth Portfolio seeks to provide long-term capital growth,
consistent with reasonable risk to principal, by investing primarily in
common stocks of companies that offer long-term growth potential. The fund
may change its objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Growth Portfolio normally seeks to achieve its goal by investing
primarily in common stocks of companies of all sizes. While the fund
invests mainly in common stocks, it may also invest in other types of
equity securities.
The adviser invests the fund's assets in common stocks of companies that
rank high on its proprietary ranking system. The adviser's system ranks
securities according to decile using historical earnings growth and
consistency, earnings acceleration, prospective earnings "surprise"
probabilities, relative price strength and valuation. The adviser further
narrows the list of potential investments using traditional fundamental
security analysis, focusing particular attention on identifying the factors
influencing earnings, understanding competitive advantages and examining
earnings sustainability. The adviser believes that companies that have
ranked highly according to its analysis are likely to provide superior
rates of return over an extended period relative to the stock market in
general.
The adviser identifies a review price for each security (usually 15% to 20%
below its purchase price) at the time it purchases the security. The
adviser continuously monitors the fund's investments and, if the price of a
security declines below its review price, the adviser may sell some or all
of that security.
Normally, the fund reserves will represent less than 20% of its respective
assets.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
1
<PAGE>
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management. This risk
is greater for small and medium sized companies, which tend to be more
vulnerable to adverse developments than larger companies.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in
this class of the fund. The bar chart shows how performance of this class
of the fund has varied from year to year. The average annual return table
compares the average annual returns of this class of the fund to those of a
broad-based securities market index. Returns are based on past results and
are not an indication of future performance.
Calendar Year Returns
29.40% 23.19% 32.09% 25.95% 23.92%
---------------------------------------------------------------------------
-7.53%
1994 1995 1996 1997 1998 1999 2000
During the periods shown in the chart for the fund, the highest return for
a quarter was __.__% (quarter ending __/__/__) and the lowest return for a
quarter was __.__% (quarter ending __/__/__).
Average Annual Returns For Periods Ended December 31, 2000
<TABLE>
<CAPTION>
1 Year 5 Years Since 12/31/93*
----------------------------------------------------------------------------
<S> <C> <C> <C>
Sirach Growth Portfolio
----------------------------------------------------------------------------
S&P 500 Index
</TABLE>
* Beginning of operations. Index comparisons begin on November 30,
1993.
2
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.65%
Other Expenses _.__%
===========================================================================
Total Annual Fund Operating Expenses _.__%
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
3
<PAGE>
Sirach Equity Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Equity Portfolio seeks to provide long-term capital growth, consistent
with reasonable risk to principal, by investing, under normal
circumstances, at least 90% of its total assets in common stocks of
companies that offer long-term growth potential.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Equity Portfolio invests at least 90% of its assets in equity
securities (primarily in common stocks) of companies of all sizes.
The adviser invests the fund's assets in common stocks of companies that
rank high on its proprietary ranking system. The adviser's system ranks
securities according to decile using historical earnings growth and
consistency, earnings acceleration, prospective earnings "surprise"
probabilities, relative price strength and valuation. The adviser further
narrows the list of potential investments using traditional fundamental
security analysis, focusing particular attention on identifying the factors
influencing earnings, understanding competitive advantages and examining
earnings sustainability. The adviser believes that companies that have
ranked highly according to its analysis are likely to provide superior
rates of return over an extended period relative to the stock market in
general.
The adviser identifies a review price for each security (usually 15% to 20%
below its purchase price) at the time it purchases the security. The
adviser continuously monitors the fund's investments and, if the price of a
security declines below its review price, the adviser may sell some or all
of that security.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in
4
<PAGE>
value or long periods of decline in value. This may occur because of
factors that affect the securities markets generally, such as adverse
changes in economic conditions, the general outlook for corporate earnings,
interest rates or investor sentiment. Equity securities may also lose value
because of factors affecting an entire industry or sector, such as
increases in production costs, or factors directly related to a specific
company, such as decisions made by its management. This risk is greater for
small and medium sized companies, which tend to be more vulnerable to
adverse developments than larger companies.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in
this class of the fund. The bar chart shows how performance of this class
of the fund has varied from year to year. The average annual return table
compares the average annual returns of this class of the fund to those of a
broad-based securities market index. Returns are based on past results and
are not an indication of future performance.
Calendar Year Returns
29.93% 29.97% 23.28%
---------------------------------------------------------------------------
1997 1998 1999 2000
During the periods shown in the chart for the fund, the highest return for
a quarter was ___% (quarter ending ________) and the lowest return for a
quarter was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31,2000
Since
1 Year 7/1/96*
----------------------------------------------------------------------------
Sirach Equity Portfolio
----------------------------------------------------------------------------
Russell 2500 Growth Index+
----------------------------------------------------------------------------
Russell 2000 Growth Index
* Beginning of operations. Index comparisons begin on November 30, 1993.
+ Beginning this period the fund has changed its comparative broad-based
securities market index from the Russell 2000 Growth Index because the
Russell 2500 is a more appropriate benchmark for this type of fund.
5
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.65%
Other Expenses* _.__%
===========================================================================
Total Annual Fund Operating Expenses _.__%
* "Other Expenses" presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because the
adviser has voluntarily agreed to limit the expenses of the fund to the
extent necessary to keep its total expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) from exceeding 0.90%
of its average daily net assets. The adviser may change or cancel its
expense limitation at any time. In addtion,"Other Expenses" do not take
into account any expense offset arrangement the fund may have that would
reduce its custodian fee based on the amount of cash the fund maintains
with its custodian. This would also have the effect of reducing the
fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
6
<PAGE>
Sirach Special Equity Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Special Equity Portfolio seeks to provide maximum long-term growth of
capital, consistent with reasonable risk to principal, by investing in
small to medium capitalized companies with particularly attractive
financial characteristics. The fund may change its objective without
shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Special Equity Portfolio seeks to achieve its goal by investing
primarily in common stocks of companies that have market capitalizations of
$100 million to $4 billion. While the fund invests mainly in common stocks,
it may also invest in other types of equity securities.
The adviser invests the fund's assets in common stocks of companies that
rank high on its proprietary ranking system. The adviser's system ranks
securities according to decile using historical earnings growth and
consistency, earnings acceleration, prospective earnings "surprise"
probabilities, relative price strength and valuation. The adviser further
narrows the list of potential investments using traditional fundamental
security analysis, focusing particular attention on identifying the factors
influencing earnings, understanding competitive advantages and examining
earnings sustainability. The adviser believes that companies that have
ranked highly according to its analysis are likely to provide superior
rates of return over an extended period relative to the stock market in
general.
The adviser identifies a review price for each security (usually 15% to 20%
below its purchase price) at the time it purchases the security. The
adviser continuously monitors the fund's investments and, if the price of a
security declines below its review price, the adviser may sell some or all
of that security.
Normally, the fund reserves will represent less than 20% of its respective
assets.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution,
7
<PAGE>
government authority or the FDIC. You may lose money by investing in the
fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have
narrower product lines and more limited financial resources. Their stocks
may trade less frequently and in limited volume.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in
this class of the fund. The bar chart shows how performance of this class
of the fund has varied from year to year. The average annual return table
compares the average annual returns of this class of the fund to those of a
broad-based securities market index. Returns are based on past results and
are not an indication of future performance.
Calendar Year Returns
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
53.65% 10.02% 18.89% 6.75% 36.21% 12.09% 11.27% 5.64% 79.58%
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a
quarter was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31,2000
1 Year 5 Years 10 Years
----------------------------------------------------------------------------
Sirach Special Equity Portfolio
----------------------------------------------------------------------------
Russell 2000 Growth Index
8
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.70%
Other Expenses _.__%
---------------------------------------------------------------------------
Total Annual Fund Operating Expenses _.__%
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
9
<PAGE>
Sirach Bond Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Bond Portfolio seeks to achieve above-average total return, consistent
with reasonable risk to principal, by investing primarily in
dollar-denominated, investment-grade fixed-income securities. The fund may
change its objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Bond Portfolio normally seeks to achieve its goal by investing at least
75% of its total assets in a diversified mix of dollar-denominated,
investment-grade debt securities.
The adviser will adjust the maturity/duration, maturity structure, sector
weightings and individual issues of the portfolio based on its assessment
of current economic conditions and trends and monetary and fiscal policies.
In selecting securities for the portfolio, the adviser tries to achieve
incremental risk-adjusted return. The adviser's fixed income management
process includes four primary elements:
. Average Maturity: The adviser's goal is to vary the average life of
the und to take advantage of predicted changes in interest rates. The
longer the fund the more its price will change as interest rates
change;
. Maturity Structure: The adviser will vary the mix of short,
intermediate and long securities to reach the target average life.
Interest rates change by different amounts at different maturities and
the goal is to take advantage of the most beneficial changes;
. Sector Allocation: The adviser will change the mix between Government,
Corporate, and Mortgage securities based on the attractiveness of each
sector's yields and the outlook for changes in those yields; and
. Issue Selection: The adviser will select the best issues available to
meet the average maturity, maturity structure and sector allocation
targets. Securities will be selected based on the attractiveness of
yields and analysis of each security's fundamental creditworthiness.
The adviser adjusts each of these elements to benefit the fund as the
environment for fixed income assets changes. In addition, analysis of
economic factors and their impact on future interest rates, comparison of
yields available among the various sectors and the analysis of individual
securities are all key parts of the process.
The adviser constantly monitors the investments of the fund, but does not
employ an automatic sell discipline. Instead, as market conditions change,
10
<PAGE>
the adviser reevaluates the investments of the fund to determine if the
securities still meet the expectations of the adviser. The adviser then
sells securities of the fund when it can replace them with securities that
will add value to the fund or it changes its investment conclusions about
the security.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
The issuer of an investment-grade security 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
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in
this class of the fund. The bar chart shows how performance of this class
of the fund has varied from year to year. The average annual return table
compares the average annual returns of this class of the fund to those of a
broad-based securities market index. Returns are based on past results and
are not an indication of future performance.
Calendar Year Returns
1998 1999 2000
7.83% -0.78%
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a
quarter was ___% (quarter ending ______).
11
<PAGE>
Average Annual Returns For Periods Ended December 31, 2000
1 Year Since 11/3/97*
===========================================================================
Bond Portfolio
----------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index
* Beginning of operations. Index comparisons begin on October 31, 1997.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.35%
Other Expenses* _.__%
===========================================================================
Total Annual Fund Operating Expenses _.__%
* "Other Expenses" presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because the
adviser has voluntarily agreed to limit the expenses of the fund to the
extent necessary to keep its total expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) from exceeding 0.50%
of its average daily net assets. The adviser may change or cancel its
expense limitation at any time. In addtion,"Other Expenses" do not take
into account any expense offset arrangement the fund may have that would
reduce its custodian fee based on the amount of cash the fund maintains
with its custodian. This would also have the effect of reducing the
fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
===========================================================================
12
<PAGE>
Sirach Strategic Balanced Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Strategic Balanced Portfolio seeks to provide long-term capital growth,
consistent with reasonable risk to principal, by investing in a diversified
portfolio of common stocks and fixed income securities. The fund may change
its objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Strategic Balanced Portfolio may invest in a combination of stocks,
bonds and short-term cash equivalents. Normally, the fund will invest 25% -
50% of its assets in debt securities and 35% - 70% of its assets in equity
securities. While the adviser can vary the composition of the fund within
those ranges, it will typically invest approximately 55 - 60% of the fund's
assets in equity securities and 40 - 45% in debt securities. The fund will
invest at least 25% of its total assets in senior debt securities,
including preferred stock.
The fund invests in equity and debt securities using the same techniques
and strategies as the Growth and Bond Portfolios, respectively.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its management.
The issuer of an investment-grade security is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse
economic
13
<PAGE>
conditions or changing circumstances, however, may weaken the capacity of
the issuer to pay interest and repay principal
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in
this class of the fund. The bar chart shows how performance of this class
of the fund has varied from year to year. The average annual return table
compares the average annual returns of this class of the fund to those of a
broad-based securities market index. Returns are based on past results and
are not an indication of future performance.
Calendar Year Returns
25.98% 13.20% 21.86% 19.35% 13.48%
----------------------------------------------------------------------------
-6.92%
1994 1995 1996 1997 1998 1999 2000
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a
quarter was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31,2000
Since
1 Year 5 Years 12/31/93*
============================================================================
Strategic Balanced Portfolio
----------------------------------------------------------------------------
S&P 500 Index
----------------------------------------------------------------------------
Lehman Brothers Aggregate Index
----------------------------------------------------------------------------
Lipper Balanced Fund Index
* Beginning of operations. Index comparisons begin on November 30, 1993.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
14
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.65%
Other Expenses _.__%
===========================================================================
Total Annual Fund Operating Expenses _.__%
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
===========================================================================
15
<PAGE>
Investing With The Uam Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with a fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept
third-party checks. You can add to an existing account by sending a check
and, if possible, the "Invest by Mail" stub that accompanied your statement
to the UAM Funds. Be sure your check identifies clearly your name, your
account number and a fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to
the UAM Funds. Finally, wire your money using the wiring instructions set
forth below. To add to an existing account by wire, call 1-877-826-5465 to
get a wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
16
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to
cancel or change it.
Minimum Investments
You can open an account with a fund with a minimum initial investment of
$2,500 ($500 for individual retirement accounts (IRAs) and $250 for Spousal
IRAs). You can buy additional shares for as little as $100.
Fund Codes
Each fund's reference information, which is listed below, will be helpful
to you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
Fund Name Trading Symbol CUSIP Fund Code
===========================================================================
Sirach Growth Portfolio SGRWX 902555655 926
---------------------------------------------------------------------------
Sirach Equity Portfolio SIEQX 902555457 924
---------------------------------------------------------------------------
Sirach Special Equity Portfolio SSEPX 902555598 928
---------------------------------------------------------------------------
Sirach Strategic Balanced Portfolio SSBAX 902555622 930
---------------------------------------------------------------------------
Sirach Bond Portfolio SBNDX 902555291 922
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
17
<PAGE>
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you
need more information.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you
must complete the appropriate sections of the account application and mail
it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login
-----------
information, including your personal identification number (PIN), please
call 1-877-826-5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial
institution. To participate in this service, you must complete the
appropriate sections of the account application and mail it to the UAM
Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in
proper form.
The UAM Funds may require that a bank or member firm of a national
securities exchange guarantee signatures. A notary public cannot guarantee
a signature. Signature guarantees are for the protection of shareholders.
Before they grant a redemption request, the UAM Funds may require a
shareholder to furnish additional legal documents to insure proper
authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check, bank check or money order.
18
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may
suspend your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
You can also exchange shares of the UAM Funds on the Internet at
www.uam.com. For login information, including your personal identification
-----------
number (PIN), please call 1-877-826-5465. Before exchanging your shares,
please read the prospectus of the UAM Fund for which you want to exchange.
You may obtain any UAM Fund prospectus by calling 1-877-826-5465. You may
only exchange shares between accounts with identical registrations (i.e.,
the same names and addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days
when the New York Stock Exchange is closed, the value of a UAM Fund may
change on days when you are unable to purchase or redeem shares.
19
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their
assets, subtracting their liabilities and then dividing the result by the
number of shares outstanding. The UAM Funds use current market prices to
value their investments. However, the UAM Funds may value investments at
fair value when market prices are not readily available or when events
occur that make established valuation methods (such as stock exchange
closing prices) unreliable. The UAM Funds will determine an investment's
fair value according to methods established by the Board. The UAM Funds
value debt securities that are purchased with remaining maturities of 60
days or less at amortized cost, which approximates market value. The UAM
Funds may use a pricing service to value some of their assets, such as debt
securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy or
sell shares at the NAV of any given day your financial intermediary must
receive your order before the close of trading on the New York Stock
Exchange that day. Your financial intermediary is responsible for
transmitting all purchase and redemption requests, investment information,
documentation and money to the UAM Funds on time. Your financial
intermediary may charge additional transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do
so, it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities
instead of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The UAM Funds will not
be responsible for any loss, liability, cost or expense for following
instructions received by telephone reasonably believed to be genuine.
20
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial investment.
This provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations
and not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, each fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of a fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in a fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such
accounts may, however, be taxable at some time in the future. You should
always consult your tax advisor for specific guidance regarding the tax
effect of your investment in the UAM Funds.
Taxes on Distributions Distributions of a fund will generally be taxable to
shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time a fund held its
investments, not how long you held your shares. Dividends and distributions
of short-tem capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as
long-term capital gains. Once a year UAM Funds will send you a statement
showing the types and total amount of distributions you received during the
previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In
this case, you would be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of your investment. This is known as "buying a
dividend" and should be avoided.
21
<PAGE>
A fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received
deduction, subject to certain holding period requirements and financing
limitations.
If a fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received
from sources in foreign countries. A fund may elect to treat some of those
taxes as a distribution to shareholders, which would allow shareholders to
offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in a
fund, you may recognize a capital gain or loss for federal tax purposes.
This gain or loss will be based on the difference between the cost of your
shares (tax basis) and the amount you receive for them. To aid in computing
your tax basis, you should keep your account statements for the periods
during which you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you
realize on shares held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain
distributions you received on the shares.
Backup Withholding By law, a fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct
taxpayer information, (ii) to properly include on your return payments of
taxable interest or dividends, or (iii) to certify to the fund that you are
not subject to back-up withholding when required to do so or that you are
an "exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of
distributions that are attributable to interest on federal securities. As
mentioned above, you should always consult your tax advisor for specific
guidance regarding the tax effect of your investment in a fund.
22
<PAGE>
Additional Information about the Funds
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, each fund may use the
investment strategies described below. Each fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of a fund's investment practices and its risks, you should read the
SAI.
Derivatives
A fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify a fund's gains or losses. There are various factors that
affect a fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives a fund
buys or sells. A fund could be negatively affected if the change in market
value of its securities fails to correlate perfectly with the values of the
derivatives it purchased or sold.
Foreign Securities
A fund may invest in securities of companies located outside of the United
States, American Depositary Receipts, European Depositary Receipts and
other similar global instruments. When a fund invests in foreign
securities, it will be subject to risks not typically associated with
domestic securities. Foreign investments, especially those of companies in
emerging markets, can be riskier and more volatile than investments in the
United States. Adverse political and economic developments or changes in
the value of foreign currency can make it harder for a fund to sell its
securities and could reduce the value of your shares. Differences in tax
and accounting standards and difficulties in obtaining information about
foreign companies can negatively affect investment decisions. Unlike more
established markets, emerging markets may have governments that are less
stable, markets that are less liquid and economies that are less developed.
23
<PAGE>
Short-Term Investing
At times, the adviser may decide to invest up to 100% of a fund's assets in
a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities
for temporary defensive purposes, to earn a return on uninvested assets or
to meet redemptions. The adviser may temporarily adopt a defensive position
to reduce changes in the value of the shares of a fund that may result from
adverse market, economic, political or other developments. When the adviser
pursues a temporary defensive strategy, a fund may not profit from
favorable developments that it would have otherwise profited from if it
were pursuing its normal strategies. Likewise, these strategies may prevent
a fund from achieving its stated objectives.
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
Investment Adviser
Sirach Capital Management, Inc., located at 3323 One Union Square, Seattle,
Washington 98101, is each fund's investment adviser. The adviser manages
and supervises the investment of each fund's assets on a discretionary
basis. The adviser 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.
Set forth in the table below are the management fees each fund paid to the
adviser during the their most recent fiscal year, expressed as a percentage
of average net assets. In addition, the adviser has voluntarily agreed to
limit the total expenses (excluding interest, taxes, brokerage commissions,
and extraordinary expenses) of this class of some or all of the funds to
the amounts listed in the table below. To maintain these expense limits,
the adviser may waive a portion of its management fee and/or reimburse
certain expenses of a fund. The adviser intends to continue its expense
limitation until further notice, but may discontinue it at any time.
Special Strategic
Growth Equity Equity Balanced Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
---------------------------------------------------------------------------
Management Fee
---------------------------------------------------------------------------
Expense Limit N/A 0.90% N/A N/A 0.50%
Portfolio Managers
A team of the adviser's investment professionals has primary responsibility
for the day-to-day management of each fund. For more information on the
composition of the team managing a fund, please see the SAI.
24
<PAGE>
Shareholder Servicing Arrangements
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial
representatives may receive compensation from a fund or its service
providers for providing a variety of services. This section briefly
describes how the financial representatives may get paid.
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of a fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with a
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of a fund or for servicing your
account. Your financial representative should provide you with a schedule
of its fees and services.
A fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure
that the fees paid are appropriate for the services performed. A fund does
not pay these service fees on shares purchased directly. In addition, the
adviser and its affiliates may, at their own expense, pay financial
representatives for these services.
UAM Fund Distributors, Inc., the fund's principal underwriter, may
participate in arrangements with selling dealers where the selling dealer
waives its right to distribution or shareholder servicing fees for selling
fund shares or servicing shareholder accounts. These arrangements typically
are intended to avoid duplicate payment of fees where the selling dealers
transactions are through an omnibus account with a different clearing
broker, and that broker is entitled to receive distribution and/or
servicing fees from the fund.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to a fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to a fund.
Additional Classes
--------------------------------------------------------------------------------
Sirach Growth Portfolio and Sirach Bond Portfolio each also offers
Institutional Service Class shares, which pay marketing or shareholder
servicing fees. Since Institutional Service Class shares have higher
expenses, their performance will be lower than the Institutional
Class.
25
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of each fund for the past five years. Certain
information contained in the table reflects the financial results for a
single share. The total returns in the table represent the rate that an
investor would have earned on an investment in each fund assuming all
dividends and distributions were reinvested. PricewaterhouseCoopers LLP has
audited this information. The financial statements and the unqualified
opinion of PricewaterhouseCoopers LLP are included in the annual report of
the funds, which is available upon request by calling the UAM Funds at
1-877-826-5465.
SIRACH GROWTH PORTFOLIO
----------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997 1996
=========================================================================
Net Asset Value, Beginning
of Period $ 13.76 $ 15.44 $ 14.01 $ 11.35
Income from Investment
Operations:
Net Investment Income (0.06) 0.02 0.12 0.12
Net Realized and Unrealized
Gain (Loss) 3.37 1.47 3.55 2.65
Total From Investment
Operations 3.31 1.49 3.67 2.77
Distributions:
Net Investment Income -- (0.04) (0.13) (0.11)
Net Realized Gain (2.44) (3.13) (2.11) --
Total Distributions (2.44) (3.17) (2.24) (0.11)
Net Asset Value, End of
Period $ 14.63 $ 13.76 $ 15.44 $ 14.01
Total Return 26.90% 11.45% 30.86% 24.52%
Ratios and Supplemental
Data
Net Assets, End of Period
(Thousands) $62,231 $84,423 $132,530 $128,982
Ratio of Expenses to
Average Net Assets 1.01% 0.91% 0.90% 0.87%
Ratio of Net Investment
Income to Average Net
Assets (0.35)% 0.17% 0.84% 0.97%
Portfolio Turnover Rate 90% 103% 138% 151%
26
<PAGE>
SIRACH EQUITY PORTFOLIO
----------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997 1996
=========================================================================
Net Asset Value, Beginning
of Period $ 15.59 $ 13.98 $ 10.97 $10.00
Income from Investment
Operations:
Net Investment Income (0.04) (0.01) 0.03 0.01
Net Realized and
Unrealized Gain (Loss) 4.08 2.01 3.06 0.97
Total From Investment
Operations 4.04 2.00 3.09 0.98
Distributions:
Net Investment Income -- (0.01) (0.02) (0.01)
Net Realized Gain (0.27) (0.38) (0.06) --
Total Distributions (0.27) (0.39) (0.08) (0.01)
Net Asset Value, End of
Period $ 19.36 $ 15.59 $ 13.98 $10.97
Total Return + 26.17 % 14.63 % 28.34% 9.80 %@
Ratios and Supplemental
Data
Net Assets, End of Period
(Thousands) $43,125 $37,939 $ 26,169 $6,410
Ratio of Expenses to
Average Net Assets 0.90 % 0.90 % 0.90% 1.03 %*
Ratio of Net Investment
Income to Average Net
Assets (0.21)% (0.08)% 0.30% 0.39 %*
Portfolio Turnover Rate 121 % 75 % 89% 34 %
* Annualized
@ Not annualized
# For the period from July 1, 1996 (commencement of operation) to October 31,
1996.
+ Total return would have been different had certain fees not been waived and
certain expenses not been assumed by the advisor during the periods
indicated.
27
<PAGE>
<TABLE>
<CAPTION>
SIRACH SPECIAL EQUITY PORTFOLIO
--------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997 1996
===========================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 10.09 $ 14.95 $ 17.98 $ 18.80
Income from Investment
Operations:
Net Investment Income (0.07) (0.10) (0.09) (0.06)
Net Realized and Unrealized
Gain (Loss) 5.85 (1.90) 0.98 3.51
Total From Investment
Operations 5.78 (2.00) 0.89 3.45
Distributions:
Net Investment Income -- -- -- (0.03)
Net Realized Gain (2.51) (2.86) (3.92) (4.24)
Total Distributions (2.51) (2.86) (3.92) (4.27)
Net Asset Value, End of
Period $ 13.36 $ 10.09 $ 14.95 $ 17.98
Total Return 71.28% (14.99)% 8.11% 23.62%
Ratios and Supplemental
Data
Net Assets, End of Period
(Thousands) $184,377 $154,373 $368,430 $441,326
Ratio of Expenses to
Average Net Assets 0.94% 0.92% 0.89% 0.87%
Ratio of Net Investment
Income to Average Net
Assets (0.57)% (0.61)% (0.53)% (0.29)%
Portfolio Turnover Rate 205% 126% 114% 129%
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
SIRACH BOND PORTFOLIO
--------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998+
===========================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 10.35 $ 10.00
Income from Investment
Operations:
Net Investment Income 0.60 0.59
Net Realized and Unrealized
Gain (Loss) (0.54) 0.28
Total From Investment
Operations 0.06 0.87
Distributions:
Net Investment Income (0.60) (0.52)
Net Realized Gain (0.11) --
Total Distributions (0.71) (0.52)
Net Asset Value, End of
Period $ 9.70 $ 10.35
Total Return+ 0.58% 8.84%@
Ratios and Supplemental
Data
Net Assets, End of Period
(Thousands) $64,847 $63,409
Ratio of Expenses to Average
Net Assets 0.50% 0.51%*
Ratio of Net Investment
Income to Average Net
Assets 5.90% 5.95%*
Portfolio Turnover Rate 170% 168%
</TABLE>
* Annualized
@ Not annualized
+ For the period from November 3, 1997 (commencement of operations) to October
31, 1998.
++ Total return would have been lower had certain fees not been waived and
certain expenses assumed by the adviser during the periods indicated.
29
<PAGE>
<TABLE>
<CAPTION>
SIRACH STRATEGIC BALANCED PORTFOLIO
--------------------------------------------------------------------------------
Years Ended October 31, 2000 1999 1998 1997 1996
===========================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 11.56 $ 12.44 $ 11.99 $ 10.75
Income from Investment
Operations:
Net Investment Income 0.25 0.28 0.37 0.36
Net Realized and Unrealized
Gain (Loss) 1.49 0.88 1.81 1.24
Total From Investment
Operations 1.74 1.16 2.18 1.60
Distributions:
Net Investment Income (0.25) (0.29) (0.37) (0.36)
Net Realized Gain (0.73) (1.75) (1.36) --
Total Distributions (0.98) (2.04) (1.73) (0.36)
Net Asset Value, End of
Period $ 12.32 $ 11.56 $ 12.44 $ 11.99
Total Return 15.74% 10.63% 20.78% 15.13%
Ratios and Supplemental
Data
Net Assets, End of Period
(Thousands) $71,014 $84,522 $86,204 $83,430
Ratio of Expenses to Average
Net Assets 1.01% 1.01% 0.97% 0.93%
Ratio of Net Investment
Income to Average Net
Assets 2.00% 2.39% 3.06% 3.04%
Portfolio Turnover Rate 83% 87% 128% 172%
</TABLE>
30
<PAGE>
The Sirach Portfolios
Investors who want more information about a fund should read the fund's
annual/semi-annual reports and the funds' statement of additional
information. The annual/semi-annual reports of a fund provide additional
information about its investments. In the annual report, you will also find
a discussion of the market conditions and investment strategies that
significantly affected the performance of each fund during the last fiscal
year. The statement of additional information contains additional detailed
information about the funds' and is incorporated by reference into (legally
part of) this prospectus.
Investors can receive free copies of the statement of additional
information, shareholder reports and other information about the UAM Funds
and can make shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about a fund (including the statement
of additional information) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get information on the
operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-202-942-8090. Reports and other information about
a fund are available on the EDGAR Database on the Securities and Exchange
Commission's Internet site at http://www.sec.gov. You may obtain copies of
------------------
this information, after paying a duplicating fee, by electronic request at
the following E-mail address: [email protected], or by writing the
------------------
Securities and Exchange Commission's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
UAM(R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
The Sterling Partners' Portfolios
Institutional Class Shares Prospectus March 1, 2001
Sterling Partners' Small Cap Value Portfolio
Sterling Partners' Balanced Portfolio
UAM(R)
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Sterling Partners' Small Cap Value Portfolio......................... 4
What are the Fund's Objectives?................................. 4
What are the Fund's Principal Investment Strategies?............ 4
What are the Fund's Principal Risks?............................ 4
How Has the Fund Performed?..................................... 5
What are the Fund's Fees and Expenses?.......................... 6
Sterling partners' Balanced Portfolio................................ 8
What are the Fund's Objectives?................................. 8
What are the Fund's Principal Investment Strategies?............ 8
What are the Fund's Principal Risks?............................ 9
How Has the Fund Performed?..................................... 10
What are the Fund's Fees and Expenses?.......................... 10
Investing with the UAM Funds......................................... 12
Buying Shares................................................... 12
Redeeming Shares................................................ 13
Exchanging Shares............................................... 15
Transaction Policies............................................ 15
Account Policies................................................ 17
Additional Information about the Funds............................... 19
Other Investment Practices and Strategies....................... 19
Investment Management........................................... 20
Shareholder Servicing Arrangements.............................. 21
Financial Highlights................................................. 22
Small Cap Value Portfolio....................................... 23
Balanced Portfolio.............................................. 23
</TABLE>
<PAGE>
Sterling Partners' Small Cap Value Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Small Cap Value Portfolio seeks to provide maximum long-term total return,
consistent with reasonable risk to principal by investing primarily in equity
securities of smaller companies, in terms of market capitalization. The fund
may change its investment objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Small Cap Value Portfolio normally seeks its objective by investing
primarily in common stocks of companies with market capitalizations of less
than $1 billion or when its market capitalization falls within the market
capitalization range of the Russell 2000 Index. As of December 31, 2000, the
Russell 2000 Index had a weighted average market capitalization of $___
billion. As of the same date the smallest company in the Russell 2000 had a
market capitalization of $___ million and the largest company had a market
capitalization of $___ billion. The adviser to fully invest the fund and
normally expects that cash reserves will represent a relatively small
percentage of the fund's assets (generally 10% or less). While the fund
invests mainly in common stocks, it may also invest in other types of equity
securities.
The adviser's stock selection process focuses on identifying securities that
are priced below the estimated value of the underlying business. The adviser
approaches each investment as a businessman would approach a private
transaction, which means that it examines all factors relevant to the worth of
an ongoing business using traditional fundamental securities analysis. Such
factors include balance sheet quality, sustainable earnings power, industry
stability, capital intensity, reinvestment opportunities, and management
talent. This "businessman's approach" is designed to produce a high quality
fund.
The adviser's sell discipline is as important as its buy discipline. For every
stock it buys, the adviser defines in writing the reasons for owning it based
on the fundamental factors noted above. The adviser reviews any stock that
underperforms its sector against a pre-written outline and sells those that
fail to demonstrate fundamental progress in keeping with the original reasons
for buying it.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a
<PAGE>
possibility that the fund will not achieve its goal. This could happen because
its strategy failed to produce the intended results or because the adviser did
not implement its strategy properly. The fund's shares are not bank deposits
and are not guaranteed, endorsed or insured by any financial institution,
government authority or the FDIC. You may lose money by investing in the fund.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors that affect the securities markets generally, such as adverse changes
in economic conditions, the general outlook for corporate earnings, interest
rates or investor sentiment. Equity securities may also lose value because of
factors affecting an entire industry or sector, such as increases in
production costs, or factors directly related to a specific company, such as
decisions made by its management.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have narrower
product lines and more limited financial resources. Their stocks may trade
less frequently and in limited volume.
Value oriented mutual funds may not perform as well as certain other types of
equity mutual funds during periods when value stocks are out of favor.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year to
year. The average annual return table compares average annual returns the fund
to those of a broad-based securities market index. Returns are based on past
results and are not an indication of future performance.
Calendar Year Returns
Calendar Year Returns
1998 -2.86%
1999 6.50%
2000 [ ]
<PAGE>
During the periods shown in the chart for the fund, the highest return for a
quarter was ___% (quarter ending ________) and the lowest return for a quarter
was ___% (quarter ending ______).
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 01/02/97*
==================================================================
Small Cap Value Portfolio
------------------------------------------------------------------
Russell 2000 Index
* Beginning of operations. Index comparisons begin on December 31, 1996.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell its shares, to reinvest dividends or to exchange into other UAM
Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay them
indirectly. This table describes the fees and expenses that you may pay if you
buy and hold shares of the fund.
Management Fees 1.00%
Other Expenses* [ ]%
==============================================================================
Total Annual Fund Operating Expenses [ ]%
* "Other Expenses" presented in the table above may be higher than the expenses
you would actually pay as a shareholder in the fund because the adviser has
voluntarily agreed to limit the expenses of the fund to the extent necessary
to keep its total expenses (excluding interest, taxes, brokerage commissions
and extraordinary expenses) from exceeding 1.25% of its average dai;y net
assets. The adviser may change or cancel its expense limitation at any time.
In addtion"Other Expenses" do not take into account any expense offset
arrangement the fund may have that would reduce its custodian fee based on the
amount of cash the fund maintains with its custodian. This would also have the
effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your shares
at the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above (which do
not reflect any expense limitations) throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
<PAGE>
Sterling partners' Balanced Portfolio
WHAT ARE THE FUND'S OBJECTIVES?
--------------------------------------------------------------------------------
The Balanced Portfolio seeks to provide maximum long-term return consistent
with reasonable risk to principal, by investing in a balanced portfolio of
common stocks and fixed-income securities. The fund may change its
investment objective without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
Typically, the Balanced Portfolio seeks its objective by investing 60% of
its assets in common stocks and 40% in debt securities and cash. While the
fund may invest in companies of any size, it expects to invest the majority
of its equity assets in companies with market capitalizations over $500
million. The adviser selects equity securities for the fund using the same
approach that it uses for the Equity and Small Cap Value Portfolios, which
is designed to identify equities priced at a discount from the estimated
value of their underlying businesses. The debt portion of the fund will
primarily consist of investment-grade debt securities. The fund will invest
at least 25% of its total assets in senior debt securities, including debt
securities and preferred stock. The adviser selects debt securities for the
portfolio using a three-step approach that emphasizes quality and capital
appreciation.
The adviser believes debt securities present the best source of income for
the fund. The adviser also views debt securities as opportunities for
capital appreciation, sources of liquidity and a means to reduce overall
portfolio volatility. The management of the debt segment of the fund
consists of three important steps. First, the adviser uses proprietary
analytical tools to manage the interest rate risk of the fund. After
arriving at an appropriate average maturity for the fund, the adviser uses
a "top down" approach to select the most attractively valued sectors for
the debt securities. Finally, it analyzes the spectrum of the yield curve
to identify the most desirable maturities at which to invest the fund. The
adviser's debt strategy emphasizes quality and capital preservation.
The adviser's stock selection process focuses on identifying securities
that are priced below the estimated value of the underlying business. The
adviser approaches each investment as a businessman would approach a
private transaction, which means that it examines all factors relevant to
the worth of an ongoing business using traditional fundamental securities
analysis. Such factors include balance sheet quality, sustainable earnings
power, industry stability, capital intensity, reinvestment opportunities,
and management talent. This "businessman's approach" is designed to produce
a high quality fund.
<PAGE>
The adviser's sell discipline is as important as its buy discipline. For
every stock it buys, the adviser defines in writing the reasons for owning
it based on the fundamental factors noted above. The adviser reviews any
stock that underperforms its sector against a pre-written outline and sells
those that fail to demonstrate fundamental progress in keeping with the
original reasons for buying it.
Another important aspect of the adviser's approach is an emphasis on
diversification across a wide range of industries. The adviser divides the
S&P 500 into industry groupings, and uses the groupings as a comparison
yardstick for the fund. The adviser seeks a healthy representation within
each sector because it believes this may allow it to control volatility
within an acceptable range.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in the fund may be
worth more or less than the price that you originally paid for it. There is
also a possibility that the fund will not achieve its goal. This could
happen because its strategy failed to produce the intended results or
because the adviser did not implement its strategy properly. The fund's
shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government authority or the FDIC. You may lose
money by investing in the fund.
As with most funds that invest in debt securities, changes in interest
rates are one of the most important factors that could affect the value of
your investment. Rising interest rates tend to cause the prices of debt
securities (especially those with longer maturities), and a fund's share
price, to fall. Rising interest rates may also cause investors to pay off
mortgage-backed and asset-backed securities later than anticipated, forcing
the fund to keep its money invested at lower rates. Falling interest rates,
however, generally cause investors to pay off mortgage-backed and asset-
backed securities earlier than expected, forcing a fund to reinvest the
money at a lower interest rate.
The credit rating or financial condition of an issuer may affect the value
of a debt security. The issuer of an investment-grade security 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.
As with all equity funds, the risks that could affect a value of the fund's
shares and the total return on your investment include the possibility that
the equity securities held by the fund will experience sudden,
unpredictable drops in value or long periods of decline in value. This may
occur because of factors that affect the securities markets generally, such
as adverse changes in economic conditions, the general outlook for
corporate earnings, interest rates or investor sentiment. Equity securities
may also lose value because of factors affecting an entire industry or
sector, such as increases in production costs, or factors directly related
to a specific company, such as decisions made by its
<PAGE>
management. This risk is greater for small and medium sized companies,
which tend to be more vulnerable to adverse developments than larger
companies.
Value oriented mutual funds may not perform as well as certain other types
of equity mutual funds during periods when value stocks are out of favor.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates some of the risks of investing in the
fund. The bar chart shows how performance of the fund has varied from year
to year. The average annual return table compares average annual returns
the fund to those of a broad-based securities market index. Returns are
based on past results and are not an indication of future performance.
Calendar Year Returns
Calendar Year Returns
1992 8.70%
1993 9.95%
1994 1.93%
1995 20.67%
1996 18.27%
1997 18.34%
1998 7.73%
1999 -0.37%
2000 [ ]
During the periods shown in the chart for the fund, the highest return for
a quarter was ____% (quarter ending _____) and the lowest return for a
quarter was ____% (quarter ending ____).
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 5 Years 03/15/91*
==========================================================================
Balanced Portfolio
--------------------------------------------------------------------------
S&P 500 Index
--------------------------------------------------------------------------
Lehman Brothers Government/Corporate Index
* Beginning of operations. Index comparisons begin on February 28, 1991.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges
to buy or sell its shares, to reinvest dividends or to exchange into other
UAM Funds.
<PAGE>
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay
them indirectly. This table describes the fees and expenses that you may
pay if you buy and hold shares of the fund.
Management Fees 0.75%
Other Expenses* [ ]%
===========================================================================
Total Annual Fund Operating Expenses [ ]%
* "Other Expenses" presented in the table above may be higher than the
expenses you would actually pay as a shareholder in the fund because the
adviser has voluntarily agreed to limit the expenses of the fund to the
extent necessary to keep its total expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) from exceeding 1.11% of
its average dai;y net assets. The adviser may change or cancel its expense
limitation at any time. In addtion"Other Expenses" do not take into account
any expense offset arrangement the fund may have that would reduce its
custodian fee based on the amount of cash the fund maintains with its
custodian. This would also have the effect of reducing the fund's expenses.
Example
This example can help you to compare the cost of investing in the fund to
the cost of investing in other mutual funds. The example assumes you invest
$10,000 in the fund for the periods shown and then redeem all of your
shares at the end of those periods. The example also assumes that you
earned a 5% return on your investment each year, that you reinvested all of
your dividends and distributions and that you paid the total expenses
stated above (which do not reflect any expense limitations) throughout the
period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
===========================================================================
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with a fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept third-
party checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the
UAM Funds. Be sure your check identifies clearly your name, your account
number and a fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10th Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to
the UAM Funds. Finally, wire your money using the wiring instructions set
forth below. To add to an existing account by wire, call 1-877-826-5465 to
get a wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to
cancel or change it.
Minimum Investments
You can open an account with either fund with a minimum initial investment
of $2,500 ($500 for individual retirement accounts (IRAs) and $250 for
Spousal IRAs). You can buy additional shares for as little as $100.
Fund Codes
Each fund's reference information, which is listed below, will be helpful
to you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
Fund Name Trading Symbol CUSIP Fund
Code
===========================================================================
Sterling Partners' Small Cap Value Portfolio SPSCX 902555432 934
--------------------------------------------------------------------------
Sterling Partners' Balanced Portfolio SPBPX 902555564 932
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
<PAGE>
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you
need more information.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you
must complete the appropriate sections of the account application and mail
it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login
-----------
information, including your personal identification number (PIN), please
call 1-877-826-5465.
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial
institution. To participate in this service, you must complete the
appropriate sections of the account application and mail it to the UAM
Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in
proper form.
The UAM Funds may require that a bank or member firm of a national
securities exchange guarantee signatures. A notary public cannot guarantee
a signature. Signature guarantees are for the protection of shareholders.
Before they grant a redemption request, the UAM Funds may require a
shareholder to furnish additional legal documents to insure proper
authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check, bank check or money order.
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may
suspend your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
You can also exchange shares of the UAM Funds on the Internet at
www.uam.com. For login information, including your personal identification
-----------
number (PIN), please call 1-877-826-5465. Before exchanging your shares,
please read the prospectus of the UAM Fund for which you want to exchange.
You may obtain any UAM Fund prospectus by calling 1-877-826-5465. You may
only exchange shares between accounts with identical registrations (i.e.,
the same names and addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days
when the New York Stock Exchange is closed, the value of a UAM Fund may
change on days when you are unable to purchase or redeem shares.
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their
assets, subtracting their liabilities and then dividing the result by the
number of shares outstanding. The UAM Funds use current market prices to
value their investments. However, the UAM Funds may value investments at
fair value when market prices are not readily available or when events
occur that make established valuation methods (such as stock exchange
closing prices) unreliable. The UAM Funds will determine an investment's
fair value according to methods established by the Board. The UAM Funds
value debt securities that are purchased with remaining maturities of 60
days or less at amortized cost, which approximates market value. The UAM
Funds may use a pricing service to value some of their assets, such as debt
securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy or
sell shares at the NAV of any given day your financial intermediary must
receive your order before the close of trading on the New York Stock
Exchange that day. Your financial intermediary is responsible for
transmitting all purchase and redemption requests, investment information,
documentation and money to the UAM Funds on time. Your financial
intermediary may charge additional transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do
so, it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities
instead of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The UAM Funds will not
be responsible for any loss, liability, cost or expense for following
instructions received by telephone reasonably believed to be genuine.
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial investment.
This provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations and
not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, each fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of a fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in a fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such
accounts may, however, be taxable at some time in the future. You should
always consult your tax advisor for specific guidance regarding the tax
effect of your investment in the UAM Funds.
Taxes on Distributions Distributions of a fund will generally be taxable to
shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time a fund held its
investments, not how long you held your shares. Dividends and distributions
of short-term capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as long-
term capital gains. Once a year UAM Funds will send you a statement showing
the types and total amount of distributions you received during the
previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In
this case, you would be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of your investment. This is known as "buying a
dividend" and should be avoided.
<PAGE>
A fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received
deduction, subject to certain holding period requirements and financing
limitations.
If a fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received
from sources in foreign countries. A fund may elect to treat some of those
taxes as a distribution to shareholders, which would allow shareholders to
offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in a
fund, you may recognize a capital gain or loss for federal tax purposes.
This gain or loss will be based on the difference between the cost of your
shares (tax basis) and the amount you receive for them. To aid in computing
your tax basis, you should keep your account statements for the periods
during which you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you
realize on shares held for six months or less will be treated as a long-
term capital loss to the extent of any long-term capital gain distributions
you received on the shares.
Backup Withholding By law, a fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct
taxpayer information, (ii) to properly include on your return payments of
taxable interest or dividends, or (iii) to certify to the fund that you are
not subject to back-up withholding when required to do so or that you are
an "exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of
distributions that are attributable to interest on federal securities. As
mentioned above, you should always consult your tax advisor for specific
guidance regarding the tax effect of your investment in a fund.
<PAGE>
Additional Information about the Funds
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, each fund may use the
investment strategies described below. Each fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of a fund's investment practices and its risks, you should read the
SAI.
American Depositary Receipts (ADRs)
Each fund may each invest up to 20% of its total assets in ADRs. ADRs are
certificates evidencing ownership of shares of a foreign established market
in the United States or elsewhere. Although they are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies, ADRs continue to be subject to many of the risks
associated with investing directly in foreign securities.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a fund to sell its securities and could reduce the value
of your shares. Changes in tax and accounting standards and difficulties
obtaining information about foreign companies can negatively affect
investment decisions.
Derivatives
A fund may invest in derivatives, a category of investments that includes
forward foreign currency exchange contracts, futures, options and swaps to
protect its investments against changes resulting from market conditions (a
practice called "hedging"), to reduce transaction costs or to manage cash
flows. Forward foreign currency exchange contracts, futures and options are
called derivatives because their value is based on an underlying asset or
economic factor. Derivatives are often more volatile than other investments
and may magnify a fund's gains or losses. There are various factors that
affect a fund's ability to achieve its objectives with derivatives.
Successful use of a derivative depends on the degree to which prices of the
underlying assets correlate with price movements in the derivatives a fund
buys or sells. A fund could be negatively affected if the change in market
value of its securities fails to correlate perfectly with the values of the
derivatives it purchased or sold.
<PAGE>
Short-Term Investing
At times, the adviser may decide to invest up to 100% of a fund's assets in
a variety of high-quality, short-term debt securities, such as U.S.
government securities. The adviser may invest in these types of securities
for temporary defensive purposes, to earn a return on uninvested assets or
to meet redemptions. The adviser may temporarily adopt a defensive position
to reduce changes in the value of the shares of a fund that may result from
adverse market, economic, political or other developments. When the adviser
pursues a temporary defensive strategy, a fund may not profit from
favorable developments that it would have otherwise profited from if it
were pursuing its normal strategies. Likewise, these strategies may prevent
a fund from achieving its stated objectives.
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
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 each fund's investment adviser. The adviser
manages and supervises the investment of each fund's assets on a
discretionary basis. The adviser has provided investment management
services to corporations, foundations, endowments, pension and profit
sharing plans, trusts, estates and other institutions and individuals since
1970.
The adviser has voluntarily agreed to limit the total expenses of one or
more of the funds to the amounts listed in the table below. To maintain
these expense limits, the adviser may waive a portion of its management fee
and/or reimburse certain expenses of the funds. The adviser intends to
continue its expense limitation until further notice, but may discontinue
it at any time. Set forth in the table below are percentages of average net
assets each fund paid in advisory fees to the adviser during the their most
recent fiscal year. This table also lists the amounts funds have agreed to
pay to the adviser.
<TABLE>
<CAPTION>
Advisory Fees Paid for
During Most Recent
Fund Name Fiscal Year Expense Limi
===================================================================================================
<S> <C> <C>
Sterling Partners' Small Cap Value Portfolio 1.25%
---------------------------------------------------------------------------------------------------
Sterling Partners' Balanced Portfolio 1.11%
</TABLE>
Portfolio Managers
A team of the adviser's investment professionals has primary responsibility
for the day-to-day management of each fund.
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial
representatives may receive compensation from a fund or its service
providers for providing a variety of services. This section briefly
describes how the financial representatives may get paid.
For providing certain services to their clients, financial representatives
may be paid a fee based on the assets of a fund that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with a
fund. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of a fund or for servicing your
account. Your financial representative should provide you with a schedule
of its fees and services.
A fund may pay all or part of the fees paid to financial representatives.
Periodically, the UAM Funds' board reviews these arrangements to ensure
that the fees paid are appropriate for the services performed. A fund does
not pay these service fees on shares purchased directly. In addition, the
adviser and its affiliates may, at their own expense, pay financial
representatives for these services.
UAM Fund Distributors, Inc., the funds' principal underwriter, may
participate in arrangements with selling dealers where the selling dealer
waives its right to distribution or shareholder servicing fees for selling
fund shares or servicing shareholder accounts. These arrangements typically
are intended to avoid duplicate payment of fees where the selling dealers
transactions are through an omnibus account with a different clearing
broker, and that broker is entitled to receive distribution and/or
servicing fees from the funds.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with
respect to a fund. The adviser may also pay its affiliated companies for
distribution and marketing services performed with respect to a fund.
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of each fund for the past five years. Certain
information contained in the table reflects the financial results for a single
share. The total returns in the table represent the rate that an investor
would have earned on an investment in each fund assuming all dividends and
distributions were reinvested. PricewaterhouseCoopers LLP has audited this
information. The financial statements and the unqualified opinion of
PricewaterhouseCoopers LLP are included in the annual report of the funds,
which is available upon request by calling the UAM Funds at
1-877-826-5465.
<PAGE>
SMALL CAP VALUE PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997#
=======================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value Beginning of Period $ 11.93 $ 13.72 $ 10.00
-----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations: 0.03 - 0.01
Net Investment Income
Net Realized and Unrealized Gain (Loss) 1.04 (1.35) 3.72
-----------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 1.07 (1.35) 3.73
-----------------------------------------------------------------------------------------------------------------------
Distributions: (0.02) - (0.01)
Net Investment Income
Net Realized Gain (0.10) (0.44) --
-----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.12) (0.44) (0.01)
-----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.88 $ 11.93 $ 13.72
=======================================================================================================================
Total Return+ 9.02% (10.08)% 37.34%@
=======================================================================================================================
Ratios and Supplemental Data $44,103 $ 35,231 $ 19,888
Net Assets, End of Period (Thousands)
Ratio of Expenses to Average Net Assets 1.25% 1.25% 1.25%*
Ratio of Net Investment Income to Average Net 0.22% 0.01% 0.06%*
Assets
Portfolio Turnover Rate 50% 70% 50%
</TABLE>
* Annualized
@ Not Annualized
# For the period from January 2, 1997 (commencement of operations) to October
31, 1997.
BALANCED PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.81 $ 13.91 $ 12.55 $ 11.86
-----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations: 0.34 0.33 0.32 0.34
Net Investment Income
Net Realized and Unrealized Gain 0.28 0.52 2.32 1.38
-----------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.62 0.85 2.64 1.72
-----------------------------------------------------------------------------------------------------------------------
Distributions: (0.32) (0.34) (0.31) (0.36)
Net Investment Income
Net Realized Gain (0.98) (1.61) (0.97) (0.67)
-----------------------------------------------------------------------------------------------------------------------
Total Distributions (1.30) (1.95) (1.28) (1.03)
-----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.13 $ 12.81 $ 13.91 $ 12.55
=======================================================================================================================
Total Return+ 5.12% 6.58% 22.58% 15.52%
=======================================================================================================================
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $61,905 $78,544 $78,283 $58,691
Ratio of Expenses to Average Net Assets 1.11% 1.11% 1.07% 1.03%
Ratio of Net Investment Income to Average Net
Assets 2.55% 2.46% 2.47% 2.77%
Portfolio Turnover Rate 82% 82% 133%++ 84%
</TABLE>
+ Total Return would have been lower had certain fees not been waived and
assumed by the Advisor during the periods indicated.
++ The turnover rate was higher than normally anticipated due to increased
shareholder activity within the Portfolio.
<PAGE>
The Sterling Partners' Portfolios
Investors who want more information about a fund should read the fund's
annual/semi-annual reports and the funds' statement of additional information.
The annual/semi-annual reports of a fund provide additional information about
its investments. In the annual report, you will also find a discussion of the
market conditions and investment strategies that significantly affected the
performance of each fund during the last fiscal year. The statement of
additional information contains additional detailed information about the
funds' and is incorporated by reference into (legally part of) this
prospectus.
Investors can receive free copies of the statement of additional information,
shareholder reports and other information about the UAM Funds and can make
shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about a fund (including the statement of
additional information) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-202-942-8090. Reports and other information about a fund are available
on the EDGAR Database on the Securities and Exchange Commission's Internet
site at http://www.sec.gov. You may obtain copies of this information, after
------------------
paying a duplicating fee, by electronic request at the following E-mail
address: [email protected], or by writing the Securities and Exchange
------------------
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
[UAM](R)
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
The TS&W Portfolios
Institutional Class Shares Prospectus March 1, 2001
TS&W Equity Portfolio
TS&W International Equity Portfolio
TS&W Fixed Income Portfolio
UAM(R)
The Securities and Exchange Commission SEC has not appeared or
disapproved these securities or passed upon the adequate or accuracy of this
prospectus. Any representation to the contrary is a criminal offense.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
TS&W Equity Portfolio..................................................... 1
What are the Fund's Investment Objectives?............................... 1
What are the Fund's Principal Investment Strategies?..................... 1
What are the Fund's Principal Risks?..................................... 3
How has the Fund Performed?.............................................. 2
What are the Fund's Fees and Expenses?................................... 3
TS&W Fixed Income Portfolio............................................... 1
What are the Fund's Investment Objectives?............................... 1
What are the Fund's Principal Investment Strategies?..................... 1
What are the Fund's Principal Risks?..................................... 3
How has the Fund Performed?.............................................. 2
What are the Fund's Fees and Expenses?................................... 2
TS&W International Equity Portfolio....................................... 1
What are the Fund's Investment Objectives?............................... 1
What are the Fund's Principal Investment Strategies?..................... 1
What are the Fund's Principal Risks?..................................... 3
How has the Fund Performed?.............................................. 2
What are the Fund's Fees and Expenses?
Investing with the UAM Funds.............................................. 12
Buying Shares............................................................ 12
Redeeming Shares......................................................... 21
Exchanging Shares........................................................ 21
Transaction Policies..................................................... 8
Account Policies
Additional Information About The Funds Error! Bookmark
Not Defined.
Other Investment Practices and Strategies................................ 20
Investment Management.................................................... 22
Shareholder Servicing Arrangements....................................... 23
Financial Highlights...................................................... 25
Equity Portfolio......................................................... 25
Fixed Income Portfolio................................................... 26
International Equity Portfolio........................................... 26
</TABLE>
<PAGE>
TS&W Equity Portfolio
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES?
--------------------------------------------------------------------------------
The Equity Portfolio seeks maximum long-term total return consistent with
reasonable risk to principal, by investing in a diversified portfolio of
common stocks of relatively large companies. The fund may change its objective
without shareholder approval.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
--------------------------------------------------------------------------------
The Equity Portfolio normally seeks to achieve its goal by investing at least
65% of its assets in a diversified portfolio of common stocks of companies
that are relatively large in terms of revenues and assets and in companies
with market capitalizations that exceed $300 million. Although the fund will
draw its holdings from primarily larger, more seasoned or established
companies, it may also invest in companies of varying size as measured by
assets, sales or capitalization. The fund will emphasize common stocks, but
may also invest in other types of equity securities.
The adviser pursues a relative value-oriented philosophy and attempts to be
risk averse believing that preserving capital in weak market environments
should lead to above-average returns over the long run. Typically, the
adviser prefers to invest in companies that possess above-average financial
characteristics in terms of balance sheet strength and profitability measures
and yet have a ratio of price-to-earnings, price-to-yield, price-to-sales, or
price-to-book value that is below the long-term average for that company.
The adviser's stock selection process combines an economic top-down approach
with valuation and fundamental analysis. The adviser looks for areas of the
economy that will have above-average earnings growth and stability over the
next one to five years by analyzing the economy and historical corporate
earnings trends. Through valuation analysis, the adviser seeks undervalued
sectors, industries and companies in the market. In conducting its
assessment, the adviser uses tools and measures such as a dividend discount
model, relative value screens, price/earnings ratios, price to book ratios and
dividend yields. Fundamental analysis is performed on industries and
companies to verify their potential attractiveness for investment. The
adviser invests in stocks of companies that it expects will benefit from
economic trends and that are attractively valued relative to their
fundamentals and other companies in the market.
The adviser sells securities when:
. Economic, valuation and fundamental criteria are no longer met;
. More attractive alternatives are found; or
<PAGE>
. Reduced risk returns from cash equivalents appear to be more attractive.
WHAT ARE THE FUND'S PRINCIPAL RISKS?
--------------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in a fund may be worth
more or less than the price that you originally paid for it. You may lose
money by investing in a fund because:
. The fund may not achieve its goal because its strategy did not produce the
intended results or because it did not implement its strategy properly.
. Unforeseen occurrences in the securities markets negatively affect the
fund.
As with all equity funds, the risks that could affect the value of the fund'
shares and the total return on your investment include the possibility that
the equity securities held by a fund will experience sudden, unpredictable
drops in value or long periods of decline in value. This may occur because of
factors affecting the securities markets generally and an entire industry or
sector or a particular company.
HOW HAS THE FUND PERFORMED?
--------------------------------------------------------------------------------
The following information illustrates how the fund's performance has varied
from year to year. The bar chart shows a fund's performance during each
calendar year for the period shown in the chart. The average annual return
table compares a fund's average annual returns to those of a broad-based
securities market index. Returns are based on past results and are not an
indication of future performance.
Calendar Year Returns
[GRAPH APPEARS HERE]
Return Quarter Ended
--------------------------------------------------------------------------------
Highest Quarter %
--------------------------------------------------------------------------------
Lowest Quarter %
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 5 Years 7/17/92*
--------------------------------------------------------------------------------
Equity Portfolio % % %
--------------------------------------------------------------------------------
S&P 500 Index % % %
<PAGE>
* Beginning of operations. Index comparisons begin on 7/31/92.
WHAT ARE THE FUND'S FEES AND EXPENSES?
--------------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or charges to
buy or sell its shares, to reinvest dividends or to exchange into other UAM
Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
The fund does have annual operating expenses and as a shareholder you pay them
indirectly. This table describes the fees and expenses that you may pay if you
buy and hold shares of the fund.
Management Fee 0.75%
----------------------------------------------------------------------------
Other Expenses [ ]%
----------------------------------------------------------------------------
Total Annual Fund Operating Expenses* [ ]%
* "Other Expenses" presented in the table above may be higher than the
expnses you would actually pay as a shareholder in a fund. This is due to
the fact that "Other Expenses" do not take into account any expense offset
arrangement a fund may have that would reduce its custodian fee based on
the amount of cash the fund maintains with its custodian. Such an
arrangement would have the effect of reducing a fund's expenses
Example
This example can help you to compare the cost of investing in this fund to the
cost of investing in other mutual funds. The example assumes you invest
$10,000 in a fund for the periods shown and then redeem all of your shares at
the end of those periods. The example also assumes that you earned a 5%
return on your investment each year, that you reinvested all of your dividends
and distributions and that you paid the total expenses stated above throughout
the period of your investment. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------
Equity Portfolio $ $ $ $
<PAGE>
TS&W Fixed Income Portfolio
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES?
---------------------------------------------------------------------------
The Fixed Income Portfolio seeks maximum long-term total return
consistent with reasonable risk to principal, by investing primarily
in investment grade debt securities of varying maturities.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
---------------------------------------------------------------------------
The Fixed Income Portfolio normally seeks to achieve its goal by
investing at least 65% of its assets in a diversified mix of
investment-grade debt securities. Although the fund currently intends
to limit its investments to investment-grade, it may invest up to 20%
of its total assets in debt securities rated below investment-grade
(junk bonds), preferred stocks and convertible securities, which have
debt characteristics. The fund may also invest up to 20% if its assets
in foreign securities, which are described under the International
Equity Portfolio.
The adviser expects to manage the fund actively to meet its investment
objectives. The adviser attempts to be risk averse believing that
preserving principal in periods of rising interest rates should lead
to above-average returns over the long run. The adviser will structure
the fund based largely on its assessment of:
. Current economic conditions and trends;
. The Federal Reserve Board's management of monetary policy;
. Fiscal policy;
. Inflation expectations;
. Government and private credit demands; and
. Global conditions.
Once the adviser has carefully analyzed these factors it will
formulate an outlook for the direction of interest rates and will
adjust the maturity and/or duration of the fund accordingly. Over the
complete economic cycle, the weighted maturity of the fund is expected
to range from six to twelve years and its duration will range from
four to six years.
In addition, the adviser tries to emphasize:
. Relative values and interest rate spreads within selected
maturity ranges, credit qualities and coupons; and
. The marketability of individual issues and diversification within
the fund.
<PAGE>
WHAT ARE THE FUND'S PRINCIPAL RISKS?
---------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in a fund may
be worth more or less than the price that you originally paid for it.
You may lose money by investing in a fund because:
. The fund may not achieve its goal because its strategy did not
produce the intended results or because it did not implement its
strategy properly.
As with most funds that invest in debt securities, changes in interest
rates are one of the most important factors that could affect the
value of your investment. Rising interest rates tend to cause the
prices of debt securities (especially those with longer maturities),
and a fund's share price, to fall. Rising interest rates may also
cause investors to pay off mortgage-backed and asset-backed securities
later than anticipated, forcing the fund to keep its money invested at
lower rates. Falling interest rates, however, generally cause
investors to pay off mortgage-backed and asset-backed securities
earlier than expected, forcing a fund to reinvest the money at a lower
interest rate.
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 risk that the issuer will fail to pay
interest fully and return principal in a timely manner. If an issuer
defaults or becomes unable to honor its financial obligations, the
security may lose some or all of its value.
HOW HAS THE FUND PERFORMED?
---------------------------------------------------------------------------
The following information illustrates how the fund's performance has
varied from year to year. The bar chart shows a fund's performance
during each calendar year for the period shown in the chart. The
average annual return table compares a fund's average annual returns
to those of a broad-based securities market index. Returns are based
on past results and are not an indication of future performance.
Calendar Year Returns
9.58% 17.13% 2.29% 9.24% 8.93%
----------------------------------------------------------------------
-4.23% -2.75%
1993 1994 1995 1996 1997 1998 1999
Return Quarter Ended
----------------------------------------------------------------------
Highest Quarter %
----------------------------------------------------------------------
Lowest Quarter %
<PAGE>
Average Annual Returns For Periods Ended December 31, 2000
Since
1 Year 5 Years 7/17/92*
---------------------------------------------------------------------------
Fixed Income Portfolio % % %
---------------------------------------------------------------------------
Lehman Brother Government/Corporate Index % % %
* Beginning of operations. Index comparisons begin on 7/31/92.
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
---------------------------------------------------------------------------
Shareholder Transaction Fees (fees paid directly from your investment)
The fund is a no-load investment, which means there are no fees or
charges to buy or sell its shares, to reinvest dividends or to
exchange into other UAM Funds.
Annual Fund Operating Expenses (expenses that are deducted from fund
assets)
The fund does have annual operating expenses and as a shareholder you
pay them indirectly. This table describes the fees and expenses that
you may pay if you buy and hold shares of the fund.
Management Fee 0.45%
----------------------------------------------------------------------
Other Expenses 0.33%
----------------------------------------------------------------------
Total Annual Fund Operating Expenses* 0.78%
* "Other Expenses" presented in the table above may be higher
than the expnses you would actually pay as a shareholder in
a fund. This is due to the fact that "Other Expenses" do not
take into account any expense offset arrangement a fund may
have that would reduce its custodian fee based on the amount
of cash the fund maintains with its custodian. Such an
arrangement would have the effect of reducing a fund's
expenses
Example
This example can help you to compare the cost of investing in this
fund to the cost of investing in other mutual funds. The example
assumes you invest $10,000 in a fund for the periods shown and then
redeem all of your shares at the end of those periods. The example
also assumes that you earned a 5% return on your investment each year,
that you reinvested all of your dividends and distributions and that
you paid the total expenses stated above throughout the period of your
investment. Although your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Fixed Income Portfolio $ $ $ $
<PAGE>
TS&W International Equity Portfolio
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES?
---------------------------------------------------------------------------
The International Equity Portfolio seeks maximum long-term total
return consistent with reasonable risk to principal, by investing in a
diversified portfolio of common stocks of primarily non-United States
(U.S.) issuers on a worldwide basis.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
---------------------------------------------------------------------------
The International Equity Portfolio normally seeks to achieve its goal
by investing primarily in a diversified fund of common stocks of non-
United States issuers on a worldwide basis. Generally, the fund will
invest in equity securities of established companies listed on foreign
securities exchanges, but it may also invest in securities traded
over-the-counter. Although the fund will emphasize larger, more
seasoned or established companies, it may invest in companies of
varying size as measured by assets, sales or capitalization. The fund
will invest primarily in securities of companies domiciled in
developed countries, but may also invest in developing countries. The
fund will normally invest at least 65% of its assets in equity
securities of foreign companies representing at least three countries
other than the United States and currently intends to invest in at
least 15 countries other than the United States.
The fund seeks to invest in companies the adviser believes will
benefit from global trends, promising business or product
developments. The adviser also looks for specific country
opportunities resulting from changing economic, social and political
trends. In selecting securities, the adviser stresses economic
analysis, fundamental security analysis and valuation analysis. It is
expected that investments will be diversified throughout the world and
within markets to minimize specific country and currency risks.
The adviser sells securities when:
. The security no longer meets the adviser's economic, valuation
and fundamental criteria; or
. It finds more attractive alternatives.
The fund also may invest in the types of investment-grade, debt
securities described under the Fixed Income Portfolio when the adviser
believes the potential for total return from debt securities will
equal or exceed that available from investments in equity
securities.
<PAGE>
WHAT ARE THE FUND'S PRINCIPAL RISKS?
---------------------------------------------------------------------------
As with all mutual funds, at any time, your investment in a fund may
be worth more or less than the price that you originally paid for it.
You may lose money by investing in a fund because:
. The fund may not achieve its goal because its strategy did not
produce the intended results or because it did not implement its
strategy properly.
. Unforeseen occurrences in the securities markets negatively
affect the fund.
As with all equity funds, the risks that could affect the value of the
fund's shares and the total return on your investment include the
possibility that the equity securities held by a fund will experience
sudden, unpredictable drops in value or long periods of decline in
value. This may occur because of factors affecting the securities
markets generally and an entire industry or sector or a particular
company.
When the fund invests in foreign securities, it will be subject to
risks not typically associated with domestic securities. Foreign
investments, especially investments in emerging markets, can be
riskier and more volatile than investments in the United States.
Adverse political and economic developments or changes in the value of
foreign currency can make it harder for the fund to sell its
securities and could reduce the value of your shares. Differences in
tax and accounting standards and difficulties in obtaining information
about foreign companies can negatively affect investment decisions.
Unlike more established markets, emerging markets may have governments
that are less stable, markets that are less liquid and economies that
are less developed.
HOW HAS THE FUND PERFORMED?
---------------------------------------------------------------------------
The following information illustrates how the fund's performance has
varied from year to year. The bar chart shows a fund's performance
during each calendar year for the period shown in the chart. The
average annual return table compares a fund's average annual returns
to those of a broad-based securities market index. Returns are based
on past results and are not an indication of future performance.
International Equity Portfolio
Calendar Year Returns
<PAGE>
32.71% -0.78% 7.21% 10.66% 2.45% 8.26% 59.06%
----------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999
Return Quarter Ended
----------------------------------------------------------------------
Highest Quarter 27.73% 12/31/99
----------------------------------------------------------------------
Lowest Quarter -18.05% 9/30/98
Average Annual Returns For Periods Ended December 31, 2000
<TABLE>
Since
1 Year 5 Years 12/18/92*
--------------------------------------------------------------------------------
<S> <C> <C> <C>
International Equity Portfolio 59.06% 15.92% 15.50%
--------------------------------------------------------------------------------
Morgan Stanley Capital International EAFE Index 26.96% 12.83% 14.71%
</TABLE>
* Beginning of operations. Index comparisons begin on 12/31/92.
WHAT ARE THE FUND'S FEES AND EXPENSES?
---------------------------------------------------------------------------
Shareholder Fees (fees paid directly from your investment)
----------------------------------------------------------------------
Redemption Fee (as a percentage of amount redeemed) 1.00%#
----------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are
deducted from the assets of a fund)
Management Fee 1.00%
----------------------------------------------------------------------
Other Expenses [ ]%
----------------------------------------------------------------------
Total Annual Fund Operating Expenses* [ ]%
# Shareholders pay a redemtpion fee when they redeem shares held
for less than the number of days listed under "Redemption Fee" in
the section on "Transaction Policies.".
* "Other Expenses" presented in the table above may be higher than
the expnses you would actually pay as a shareholder in a fund.
This is due to the fact that "Other Expenses" do not take into
account any expense offset arrangement a fund may have that would
reduce its custodian fee based on the amount of cash the fund
maintains with its custodian. Such an arrangement would have the
effect of reducing a fund's expenses
Example
This example can help you to compare the cost of investing in this
fund to the cost of investing in other mutual funds. The example
assumes you invest $10,000 in a fund for the periods shown and then
redeem all of your shares at the end of those periods. The example
also assumes that you earned a 5% return on your investment each year,
that you reinvested all of your dividends and distributions and that
you paid the total expenses stated above throughout the period of your
investment. Although your actual costs may be higher or lower, based
on these assumptions your costs would be:
<PAGE>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
International Equity Portfolio $ $ $ $
<PAGE>
Investing with the UAM Funds
BUYING SHARES
--------------------------------------------------------------------------------
By Mail
You can open an account with a fund by sending a check or money order and
your account application to the UAM Funds. You should make your check or
money order payable to the "UAM Funds." The UAM Funds do not accept third-
party checks. You can add to an existing account by sending a check and, if
possible, the "Invest by Mail" stub that accompanied your statement to the
UAM Funds. Be sure your check identifies clearly your name, your account
number and a fund name.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Express Mail Address
UAM Funds
210 West 10/th/ Street
Kansas City, MO 64105
By Wire
To open an account by wire, first call 1-877-826-5465 for an account number
and wire control number. Next, send your completed account application to
the UAM Funds. Finally, wire your money using the wiring instructions set
forth below. To add to an existing account by wire, call 1-877-826-5465 to
get a wire control number and wire your money to the UAM Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: fund name/account number/
account name/wire control number
By Automatic Investment Plan (Via Automated Clearing House or ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up an automatic investment plan by mailing a completed
application to the UAM Funds. To cancel or change a plan, write
<PAGE>
to the UAM Funds. Allow up to 15 days to create the plan and 3 days to
cancel or change it.
Minimum Investments
You can open an account with either fund with a minimum initial investment
of $2,500 ($500 for individual retirement accounts (IRAs) and $250 for
Spousal IRAs). You can buy additional shares for as little as $100.
Fund Codes
Each fund's reference information, which is listed below, will be helpful
to you when you contact the UAM Funds to purchase or exchange shares, check
daily net asset value per share (NAV) or get additional information.
<TABLE>
<CAPTION>
Fund Name Trading Fund
Symbol CUSIP Code
===================================================================================================
<S> <C> <C> <C>
Equity Portfolio TSWEX 902555499 936
---------------------------------------------------------------------------------------------------
Fixed Income Portfolio TSWFX 902555481 937
---------------------------------------------------------------------------------------------------
International Equity Portfolio TSWIX 902555473 938
</TABLE>
Rights Reserved by the UAM Funds
At any time and without notice, the UAM Funds may:
. Stop offering shares;
. Reject any purchase order; or
. Bar an investor engaged in a pattern of excessive trading from buying
shares. (Excessive trading can hurt performance by disrupting
management and by increasing expenses.)
REDEEMING SHARES
--------------------------------------------------------------------------------
By Mail
Send a letter to the UAM Funds specifying:
. The fund name;
. The account number;
. The dollar amount or number of shares you wish to redeem;
. The account name(s); and
. The address.
All registered share owner(s) in the exact name(s) and any special capacity
in which they are registered must sign the letter.
<PAGE>
Certain shareholders may need to include additional documents to redeem
shares. Please see the Statement of Additional Information (SAI) if you
need more information.
Regular Mail Address
UAM Funds
PO Box 219081
Kansas City, MO 64121
Redemption Fee
--------------
The International Equity Portfolio will deduct a 1.00% redemption fee from
the redemption proceeds of any shareholder redeeming shares of the fund
held for less than ninety (90) days.
The fund will retain the fee for the benefit of the remaining shareholders.
The fund charges the redemption fee to help minimize the impact the
redemption may have on the performance of the fund, to facilitate fund
management and to offset certain transaction costs and other expenses the
fund incurs because of the redemption. The fund also charges the redemption
fee to discourage market timing by those shareholders initiating
redemptions to take advantage of short-term market movements.
By Telephone
You may redeem shares over the phone by calling 1-877-826-5465. To
participate in this service and to receive your redemptions by wire, you
must complete the appropriate sections of the account application and mail
it to the UAM Funds.
Online
You can redeem shares on the Internet at www.uam.com. For login
------------
information, including your personal identification number (PIN), please
call 1-877-826-5465 .
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may transfer as little as
$100 per month from your UAM Funds account to another financial
institution. To participate in this service, you must complete the
appropriate sections of the account application and mail it to the UAM
Funds.
Payment of Redemption Proceeds
Redemption proceeds can be mailed to your account address, sent to your
bank by ACH transfer or wired to your bank account (provided that your bank
information is already on file). The UAM Funds will pay for all shares
redeemed within seven days after they receive a redemption request in
proper form.
The UAM Funds may require that a bank or member firm of a national
securities exchange guarantee signatures. A notary public cannot guarantee
a signature. Signature guarantees are for the protection of shareholders.
Before they grant a redemption request, the UAM Funds may require a
shareholder to furnish additional legal documents to insure proper
authorization.
If you redeem shares that were purchased by check, you will not receive
your redemption proceeds until the check has cleared, which may take up to
15 days from the purchase date. You may avoid these delays by paying for
shares with a certified check, bank check or money order.
<PAGE>
Rights Reserved by the UAM Funds
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail. The UAM Funds may
suspend your right to redeem if:
. Trading on the New York Stock Exchange is restricted; or
. The Securities and Exchange Commission allows the UAM Funds to delay
redemptions.
EXCHANGING SHARES
--------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
You can also exchange shares of the UAM Funds on the Internet at
www.uam.com. For login information, including your personal identification
------------
number (PIN), please call 1-877-826-5465. Before exchanging your shares,
please read the prospectus of the UAM Fund for which you want to exchange.
You may obtain any UAM Fund prospectus by calling 1-877-826-5465. You may
only exchange shares between accounts with identical registrations (i.e.,
the same names and addresses).
Rights Reserved by the UAM Funds
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders;
. Reject any request for an exchange; or
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
TRANSACTION POLICIES
--------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund on each day the New York
Stock Exchange is open at a price equal to its NAV next computed after it
receives and accepts your order. NAVs are calculated as of the close of
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time).
Therefore, to receive the NAV on any given day, the UAM Funds must accept
your order before the close of trading on the New York Stock Exchange that
day. Otherwise, you will receive the NAV that is calculated at the close of
trading on the following business day.
Since securities that are traded on foreign exchanges may trade on days
when the New York Stock Exchange is closed, the value of a UAM Fund may
change on days when you are unable to purchase or redeem shares.
<PAGE>
The UAM Funds calculate their NAVs by adding the total value of their
assets, subtracting their liabilities and then dividing the result by the
number of shares outstanding. The UAM Funds use current market prices to
value their investments. However, the UAM Funds may value investments at
fair value when market prices are not readily available or when events
occur that make established valuation methods (such as stock exchange
closing prices) unreliable. The UAM Funds will determine an investment's
fair value according to methods established by the Board. The UAM Funds
value debt securities that are purchased with remaining maturities of 60
days or less at amortized cost, which approximates market value. The UAM
Funds may use a pricing service to value some of their assets, such as debt
securities or foreign securities.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy or
sell shares at the NAV of any given day your financial intermediary must
receive your order before the close of trading on the New York Stock
Exchange that day. Your financial intermediary is responsible for
transmitting all purchase and redemption requests, investment information,
documentation and money to the UAM Funds on time. Your financial
intermediary may charge additional transaction fees for its services.
Certain financial intermediaries have agreements with the UAM Funds that
allow them to enter confirmed purchase or redemption orders on behalf of
clients and customers. Under this arrangement, the financial intermediary
must send your payment to the UAM Funds by the time they price their shares
on the following business day. If your financial intermediary fails to do
so, it may be responsible for any resulting fees or losses.
In-Kind Transactions
Under certain conditions and at the UAM Funds' discretion, you may pay for
shares of a UAM Fund with securities instead of cash. In addition, the UAM
Funds may pay all or part of your redemption proceeds with securities
instead of cash.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The UAM Funds will not
be responsible for any loss, liability, cost or expense for following
instructions received by telephone reasonably believed to be genuine.
<PAGE>
ACCOUNT POLICIES
--------------------------------------------------------------------------------
Small Accounts
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial investment.
This provision does not apply:
. To retirement accounts and certain other accounts; or
. When the value of your account falls because of market fluctuations and
not your redemptions.
The UAM Funds will notify you before liquidating your account and allow you
60 days to increase the value of your account.
Distributions
Normally, each fund distributes its net investment income quarterly and its
net capital gains at least once a year. The UAM Funds will automatically
reinvest dividends and distributions in additional shares of a fund, unless
you elect on your account application to receive them in cash.
Federal Taxes
The following is a summary of the federal income tax consequences of
investing in a fund. This summary does not apply to shares held in an
individual retirement account or other tax-qualified plan, which are not
subject to current tax. Transactions relating to shares held in such
accounts may, however, be taxable at some time in the future. You should
always consult your tax advisor for specific guidance regarding the tax
effect of your investment in the UAM Funds.
Taxes on Distributions Distributions of a fund will generally be taxable to
shareholders as ordinary income or capital gains. You will be subject to
income tax on these distributions regardless of whether they are paid in
cash or reinvested in additional shares. The amount of tax you may pay on a
distribution will be based on the amount of time a fund held its
investments, not how long you held your shares. Dividends and distributions
of short-term capital gains (capital gains relating to securities held for
twelve months or less) are generally taxable at the same rate as ordinary
income. Distributions of long-term capital gains (capital gains relating to
securities held for more than twelve months) are generally taxable as long-
term capital gains. Once a year UAM Funds will send you a statement showing
the types and total amount of distributions you received during the
previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In
this case, you would be taxed on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of your investment. This is known as "buying a
dividend" and should be avoided.
<PAGE>
A fund's dividends that are paid to its corporate shareholders and are
attributable to qualifying dividends the fund receives from U. S.
corporations may be eligible for the corporate dividends-received
deduction, subject to certain holding period requirements and financing
limitations.
If a fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest a fund received
from sources in foreign countries. A fund may elect to treat some of those
taxes as a distribution to shareholders, which would allow shareholders to
offset some of their U.S. federal income tax.
Taxes on Exchanges and Redemptions When you exchange or redeem shares in a
fund, you may recognize a capital gain or loss for federal tax purposes.
This gain or loss will be based on the difference between the cost of your
shares (tax basis) and the amount you receive for them. To aid in computing
your tax basis, you should keep your account statements for the periods
during which you held shares.
Generally, your gain or loss will be long-term or short-term depending on
whether your holding period exceeds 12 months. However, any loss you
realize on shares held for six months or less will be treated as a long-
term capital loss to the extent of any long-term capital gain distributions
you received on the shares.
Backup Withholding By law, a fund must withhold 31% of your distributions
and redemption proceeds if you fail (i) to provide complete, correct
taxpayer information, (ii) to properly include on your return payments of
taxable interest or dividends, or (iii) to certify to the fund that you are
not subject to back-up withholding when required to do so or that you are
an "exempt recipient."
State and Local Taxes
You may also have to pay state and local taxes on distributions and
redemptions. However, state taxes may not apply to portions of
distributions that are attributable to interest on federal securities. As
mentioned above, you should always consult your tax advisor for specific
guidance regarding the tax effect of your investment in a fund.
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
OTHER INVESTMENT PRACTICES AND STRATEGIES
--------------------------------------------------------------------------------
In addition to its principal investment strategies, each fund may use the
investment strategies described below. Each fund may also employ investment
practices that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For more information concerning
any of a fund's investment practices and its risks, you should read the
SAI.
What are the Characteristics and Risks of the Securities in which the Funds
Invest?
Debt Securities
A debt security is an interest bearing security that corporations and
governments use to borrow money from investors. The issuer of a debt
security promises to pay interest at a stated rate, which may be variable
or fixed, and to repay the amount borrowed at maturity (dates when debt
securities are due and payable). The fund may invest in a variety of types
of debt securities, including those issued by corporations and the U.S.
government and its agencies, mortgage-backed and asset-backed securities
(securities that are backed by pools of loans or mortgages assembled for
sale to investors), municipal notes and bonds, commercial paper and
certificates of deposit.
The concept of duration is useful in assessing the sensitivity of a fixed-
income fund to interest rate movements, which are the main source of risk
for most fixed-income funds. Duration measures price volatility by
estimating the change in price of a debt security for a 1% change in its
yield. For example, a duration of five years means the price of a debt
security will change about 5% for every 1% change in its yield. Thus, the
higher the duration, the more volatile the security.
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the price of the bond will
go down, and vice versa). Some types of debt securities are more affected
by changes in interest rates than others. For example, changes in rates may
cause people to pay off or refinance the loans underlying mortgage-backed
and asset-backed securities earlier or later than expected, which would
shorten or lengthen the maturity of the security. This behavior can
negatively affect the performance of a fund by shortening or lengthening
its average maturity and, thus, changing its effective duration. The
unexpected timing of mortgage-backed and asset-backed prepayments caused by
changes in interest rates may also
<PAGE>
cause the fund to reinvest its assets at lower rates, reducing the yield of
the fund.
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 risk that the issuer will fail to pay interest fully and
return principal in a timely manner. If an issuer defaults or becomes
unable to honor its financial obligations, the security 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.
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks,
preferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the
securities markets generally, such as adverse changes in economic
conditions, the general outlook for corporate earnings, interest rates or
investor sentiment. These circumstances may lead to long periods of poor
performance, such as during a "bear market." Equity securities may also
lose value because of factors affecting an entire industry or sector, such
as increases in production costs, or factors directly related to a specific
company, such as decisions made by its management.
Foreign Securities
Foreign securities include securities of companies located outside the
United States and American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs) and other similar global instruments. ADRs are certificates
evidencing ownership of shares of a foreign issuer that are issued by
depository banks and generally trade on an established market in the United
States or elsewhere. EDRs are similar to ADRs, except that European Banks
or trust companies typically issue them. Although ADRs and EDRs are
alternatives to directly purchasing the underlying foreign securities in
their national markets and currencies, they continue to be subject to many
of the risks associated with investing directly in foreign securities.
Foreign equity and fixed income 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.
<PAGE>
Local political, economic, regulatory or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. A foreign government may act adversely to the
interests of U.S. investors. Such actions may include expropriation or
nationalization of assets, confiscatory taxation and other restrictions on
U.S. investment.
Changes in foreign currency rates and in exchange control regulations may
positively or negatively affect the value of its securities. The adviser
may try to mitigate those risks by engaging in such currency hedging
transactions as the manager deems necessary, including hedging the foreign
currency value of the securities back into U.S. dollars and translating any
gains, losses, income or expenses back into U.S. dollars. These
transactions may include foreign exchange transactions, as well as foreign
currency futures, currency options, and currency swap contracts. The
adviser may, however, choose to leave certain foreign assets unhedged if
the anticipated movement in currencies favors such a position.
Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the United States. Securities of
some foreign issuers may be less liquid and more volatile than securities
of comparable U.S. issuers. In addition, the costs associated with foreign
investments, including withholding taxes, brokerage commissions and
custodial costs, are generally higher than the costs associated with U.S.
investments.
Foreign countries generally have different legal systems and different
regulations concerning financial disclosure, accounting and auditing
standards than the United States. This could make corporate financial
information more difficult to obtain or understand and less reliable than
information about U.S. companies.
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, may present the risks of nationalization of businesses,
restrictions on foreign ownership and prohibitions on the repatriation
of assets.
. They may protect property rights less than more developed countries.
. The economies of countries with emerging markets may be 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 of a country with emerging markets may trade a
small number of securities and may be unable to respond effectively to
<PAGE>
increases in trading volume, potentially making prompt liquidation of holdings
difficult or impossible at times.
Derivatives
Generally, a derivative is a financial transaction whose value is based on the
value of an underlying asset, interest rate, exchange rate, stock index or
other measures. Each fund may use futures, options, foreign currency
exchange contracts and swaps to protect against a change in the price of an
investment the fund owns or anticipates buying in the future (a practice known
as hedging). The fund also may use futures and options to remain fully
invested and to reduce transaction costs.
Futures contracts are contracts that obligate the buyer to receive and the
seller to deliver a security or money on a specified date. Options grant
the right, but not the obligation, to buy or sell a specified amount of a
security or other assets on or before a specified date at a predetermined
price. Swap transactions obligates two parties to exchange, or swap, a series
of cash flows at specified dates. Foreign currency exchange contracts
involve an obligation to purchase or sell a specific amount of currency at a
future date at a specific price.
Derivatives are often more volatile than other investments and may magnify a
fund's gains or losses. A fund may lose money if the adviser:
. Fails to predict correctly the direction in which the underlying asset or
economic factor will move.
. Judges market conditions incorrectly.
. Employs a strategy that does not correlate well with the investments of the
fund.
Short-Term Investing
At times, the adviser may decide to invest up to 100% of a fund's assets in a
variety of high-quality, short-term debt securities, such as U.S. government
securities. The adviser may invest in these types of securities for temporary
defensive purposes, to earn a return on uninvested assets or to meet
redemptions. The adviser may temporarily adopt a defensive position to reduce
changes in the value of the shares of a fund that may result from adverse
market, economic, political or other developments.
When the adviser pursues a temporary defensive strategy, a fund may not profit
from favorable developments that it would have otherwise profited from if it
were pursuing its normal strategies. Likewise, these strategies may prevent a
fund from achieving its stated objectives.
<PAGE>
INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
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 funds. The adviser manages and supervises the investment of each
fund'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.
Set forth in the table below are the management fees each fund paid to the
adviser during their most recent fiscal year, expressed as a percentage of
average net assets.
Fixed Income
Equity Portfolio Int'l Equity Portfolio Portfolio
--------------------------------------------------------------------------------
Management Fee 0.75% 1.00% 0.45%
Portfolio Managers
Balanced, Equity and Fixed Income Portfolios
Investment committees are primarily responsible for the day-today- management
of the Balanced, Equity and Fixed Income Portfolios. For more information
concerning the composition of those committees, including biographies of some
of their members, please see the SAI
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 in the SAI.
SHAREHOLDER SERVICING ARRANGEMENTS
--------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial representatives
may receive compensation from the UAM Funds or their service providers for
providing a variety of services. This section briefly describes how the
financial representatives may get paid.
<PAGE>
For providing certain services to their clients, financial representatives may
be paid a fee based on the assets of the UAM Funds that are attributable to
the financial representative. These services may include record keeping,
transaction processing for shareholders' accounts and certain shareholder
services not currently offered to shareholders that deal directly with the UAM
Funds. In addition, your financial representatives may charge you other
account fees for buying or redeeming shares of the UAM Funds or for servicing
your account. Your financial representative should provide you with a schedule
of its fees and services.
The UAM Funds may pay all or part of the fees paid to financial
representatives. Periodically, the board of the UAM Funds reviews these
arrangements to ensure that the fees paid are appropriate to the services
performed. The UAM Funds do not pay these service fees on shares purchased
directly. In addition, the adviser and its affiliates may, at their own
expense, pay financial representatives for these services.
UAM Fund Distributors Inc., the fund's principal underwriter may participate
in arrangements with selling dealers where the selling dealer waives its right
to distribution of shareholder servicing fees for selling fund shares or
servicing shareholder accounts. These arrangements typically are intended to
avoid duplicate payment of fees, where the selling dealer's transactions are
through an omnibus account with a different clearing broker, and that broker
is entitled to receive distribution and/or servicing fees from the fund.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with respect
to the UAM Funds.
The adviser may pay its affiliated companies for distribution and marketing
services performed with respect to the UAM Funds.
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of the funds for the fiscal periods indicated. Certain
information contained in the table reflects the financial results for a single
share. The total returns in the table represent the rate that an investor
would have earned on an investment in the funds assuming all dividends and
distributions were reinvested. PricewaterhouseCoopers LLP has audited this
information. The financial statements and the unqualified opinion of
PricewaterhouseCoopers LLP are included in the annual report of the funds,
which is available upon request by calling the UAM Funds at 1-877-826-5465.
EQUITY PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.85 $ 16.52 $ 14.48 $ 12.47
--------------------------------------------------------------------------------------------------------
Income from Investment Operations: 0.23 0.26 0.27 0.26
Net Investment Income
Net Realized and Unrealized Gain 1.78 1.14 3.25 2.34
--------------------------------------------------------------------------------------------------------
Total From Investment Operations 2.01 1.40 3.52 2.60
--------------------------------------------------------------------------------------------------------
Distributions: (0.24) (0.24) (0.27) (0.26)
Net Investment Income
Net Realized Gain (1.20) (2.83) (1.21) (0.33)
--------------------------------------------------------------------------------------------------------
Total Distributions (1.44) (3.07) (1.48) (0.59)
--------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 15.42 $ 14.85 $ 16.52 $ 14.48
--------------------------------------------------------------------------------------------------------
Total Return 14.64% 9.23% 26.31% 21.45%
--------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data $93,234 $95,336 $95,582 $81,554
Net Assets, End of Period (Thousands)
Ratio of Expenses to Average Net Assets 1.05% 0.99% 0.99% 1.01%
Ratio of Net Investment Income to
Average Net Assets 1.40% 1.67% 1.72% 1.93%
Portfolio Turnover Rate 42% 63% 42% 40%
</TABLE>
<PAGE>
FIXED INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.96 $ 10.54 $ 10.30 $ 10.42
-------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income 0.57 0.59 0.59 0.56
Net Realized and Unrealized Gain
(Loss) (0.75) 0.42 0.24 (0.12)
-------------------------------------------------------------------------------------------------------------------
Total From Investment Operations (0.18) 1.01 0.83 0.44
-------------------------------------------------------------------------------------------------------------------
Distributions: (0.58) (0.59) (0.59) (0.56)
Net Investment Income
Net Realized Gain (0.13) -- -- --
-------------------------------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.59) (0.59) (0.56)
-------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.07 $ 10.96 $ 10.54 $ 10.30
-------------------------------------------------------------------------------------------------------------------
Total Return (1.71)% 9.81% 8.40% 4.40%
-------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data
Net Assets, End of Period (Thousands) $66,180 $73,784 $67,987 $61,692
Ratio of Expenses to Average Net
Assets 0.78% 0.71% 0.72% 0.77%
Ratio of Net Investment Income (Loss)
to Average Net Assets 5.49% 5.48% 5.79% 5.50%
Portfolio Turnover Rate 52% 48% 36% 59%
</TABLE>
INTERNATIONAL EQUITY PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31, 2000 1999 1998 1997 1996
======================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 15.10 $ 15.14 $ 14.22 $ 13.22
-----------------------------------------------------------------------------------------------------------------------
Income from Investment
Operations:
Net Investment Income 0.08 0.06 0.07 0.10
Net Realized and Unrealized
Gain (Loss) 5.01 0.32 1.05 1.04
-----------------------------------------------------------------------------------------------------------------------
Total From Investment
Operations 5.09 0.38 1.12 1.14
-----------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income (0.02) (0.08) (0.11) (0.14)
Net Realized Gain -- (0.18) (0.09) --
In Excess of Net Realized Gain -- (0.16) -- --
-----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) (0.42) (0.20) (0.14)
-----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 20.17 $ 15.10 $ 15.14 $ 14.22
-----------------------------------------------------------------------------------------------------------------------
Total Return 33.77% 2.67% 7.94% 8.71%
=======================================================================================================================
Ratios and Supplemental Data
Net Assets, End of Period
(Thousands) $114,213 $116,969 $115,500 $103,339
Ratio of Expenses to Average Net
Assets 1.37% 1.32% 1.30% 1.35%
Ratio of Net Investment Income
to Average Net Assets 0.39% 0.42% 0.47% 0.84%
Portfolio Turnover Rate 21% 28% 45% 25%
</TABLE>
The TS&W Portfolios
Investors who want more information about a fund should read the fund's
annual/semi-annual reports and the funds' statement of additional information.
The annual/semi-annual reports of a fund provide additional information about
its investments. In the annual report, you will also find a
28
<PAGE>
discussion of the market conditions and investment strategies that
significantly affected the performance of each fund during the last fiscal
year. The statement of additional information contains additional detailed
information about the funds' and is incorporated by reference into (legally
part of) this prospectus.
Investors can receive free copies of the statement of additional information,
shareholder reports and other information about the UAM Funds and can make
shareholder inquiries by writing to or calling:
UAM Funds
PO Box 219081
Kansas City, MO 64121
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
You can review and copy information about a fund (including the statement of
additional information) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-202-942-8090. Reports and other information about a fund are available
on the EDGAR Database on the Securities and Exchange Commission's Internet
site at http://www.sec.gov. You may obtain copies of this information, after
------------------
paying a duplicating fee, by electronic request at the following E-mail
address: [email protected], or by writing the Securities and Exchange
------------------
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act of 1940 file number: 811-5683.
UAM(R)
UAM(R)
29
<PAGE>
PART B
UAM FUNDS, INC.
The following Statements of Additional Information are included in this Post-
Effective Amendment No. 56:
. Acadian Emerging Markets Portfolio.
. The C&B Portfolios.
. The DSI Portfolios.
. FMA Small Company Portfolio.
. ICM Small Company Portfolio.
. The McKee Portfolios.
. The NWQ Special Equity Portfolio.
. Rice, Hall, James Small Cap Portfolio and Rice, Hall, James Small/Mid
Cap Portfolio.
. Sirach Portfolios.
. Sterling Partners' Portfolios
. The TS&W Portfolios.
<PAGE>
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 __, 2001
This statement of additional information (SAI) is not a prospectus. However you
should read it in conjunction with the prospectus of the Fund dated February
__, 2001, as supplemented from time to time. You may obtain the Fund's
prospectus by contacting the UAM Funds at the address listed above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Description of Permitted Investments.......................... 1
Borrowing................................................... 1
Debt Securities............................................. 1
Derivatives................................................. 7
Equity Securities........................................... 15
Foreign Securities.......................................... 17
Investment Companies........................................ 21
Repurchase Agreements....................................... 21
Restricted Securities....................................... 21
Securities Lending.......................................... 22
Short Sales................................................. 22
When Issued Transactions.................................... 23
Investment Policies of the FUND............................... 23
Fundamental Policies........................................ 24
Non-Fundamental Policies.................................... 24
Management of the Company..................................... 25
Board Members............................................... 25
Officers.................................................... 26
Principal Shareholders........................................ 27
Investment Advisory and Other Services........................ 27
Investment Adviser.......................................... 28
Distributor................................................. 29
Shareholder Servicing Arrangements.......................... 29
Administrative Services..................................... 29
Custodian................................................... 31
Independent Accountants..................................... 31
CODE OF ETHICS.............................................. 31
Brokerage Allocation and Other Practices...................... 31
Selection of Brokers........................................ 31
Simultaneous Transactions................................... 32
Brokerage Commissions....................................... 32
Capital Stock and Other Securities............................ 33
Purchase, Redemption and Pricing of Shares.................... 35
Net Asset Value Per Share................................... 35
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.............................. 45
Fitch IBCA Ratings.......................................... 47
Comparative Benchmarks........................................ 48
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Fund's prospectus, the Fund may use a variety of
investment strategies in addition to its principal investment strategies. This
SAI describes each of these investments/strategies and their risks. The Fund
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. You can find more information
concerning the limits on the ability of the Fund to use these investments in
"Investment Policies of the Fund?"
BORROWING
--------------------------------------------------------------------------------
The Fund may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 33 1/3% of its total assets
(including the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss. To
mitigate the risks of leverage, the Fund will limit the amount it may borrow
to not more than 33 1/3% of its total assets, taken at market value. In
addition, the Fund will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
The Fund will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
DEBT SECURITIES
--------------------------------------------------------------------------------
Corporations and government 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 "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.
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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 Fund.
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
considered the equivalent of treasury securities and are backed by the full
faith and credit of the U.S. government. 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 Fund shares. To buy GNMA securities, the Fund may have to pay a
premium over the maturity value of the underlying mortgages, which the Fund
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.
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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. For example, payments of
interest and principal are more frequent (usually monthly) and their interest
rates are sometimes adjustable. In addition, 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 Fund 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.
The Fund 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.
3
<PAGE>
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Fund 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 Fund 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
Fund 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 Fund 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 Fund may invest in commercial
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<PAGE>
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 Fund'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 Fund may 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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Fund
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 Fund. If left unattended,
drifts in the average maturity of the Fund can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Fund.
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Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Fund's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Fund 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." If 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 Fund 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 Fund 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 Fund 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 Fund are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise stated
in the Fund's prospectus, the Fund may use derivatives to gain exposure to
various markets in a cost efficient manner,
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to reduce transaction costs or to remain fully invested. The Fund may also
invest in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Fund 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 Fund
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 or custodian bank, 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 Fund may incur commission expenses when it opens or closes a futures
position.
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 Fund 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 Fund 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
Fund 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 Fund obtain the right
to purchase, rather than sell, the underlying instrument at the option's
strike price. The Fund would normally purchase call options in anticipation of
an increase in the market value of securities it owns or wants to buy. The
Fund 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 Fund 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 Fund 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 Fund
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 Fund 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 Fund 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 Fund 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 Fund would hope to profit by
closing out the put option at a lower price. If security prices fall, the Fund
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 Fund 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 Fund 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 Fund would expect the option to expire and the
premium it received to offset the decline of the security's value. However,
the Fund 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 Fund is permitted only to write covered options. At the time of selling
the call option, the Fund may cover the option by owning:
. 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;
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. 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.
At the time of selling a put option, the Fund may cover the put option by:
. 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 Fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Fund 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 Fund 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 Fund 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 Fund 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 Fund 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 Fund.
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Combined Positions
The Fund 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 Fund 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 Fund 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 Fund
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 Fund 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 Fund 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 Fund could also hedge the position by selling
another currency expected to perform similarly to the currency in which the
Fund'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 Fund 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 Fund 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
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currency that is purchased. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Fund 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 Fund 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 Fund 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 Fund 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 Fund. If a
swap agreement calls for payments by the Fund, the Fund 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 Fund 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 Fund 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 Fund's gains or
losses. In order to reduce the risk associated with leveraging, the Fund may
cover its current obligations under swap agreements according to guidelines
established by the SEC. If the Fund 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 Fund's accrued obligations under the swap agreement over the accrued
amount the Fund are 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 Fund'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 Fund 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, the Fund could lose money by
investing in an interest rate swap if interest rates change adversely. For
example, if the Fund enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Fund may have to pay more
money than it receives. Similarly, if the Fund enter into a swap where it
agrees to exchange a fixed rate of interest for a floating rate of interest,
the Fund 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. The Fund 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 Fund than if it had not entered into any
derivatives transactions. Derivatives may magnify the Fund'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
Fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Fund to greater risks.
Correlation of Prices
The Fund'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 Fund are 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 Fund's prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Fund 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 Fund. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Fund'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 Fund's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Fund can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Fund may close out a futures contract only on the exchange the
contract was initially traded. Although the Fund intend 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 Fund may not be able
to close out its position. In an illiquid market, the Fund 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
Fund may lose money by investing in derivatives. For example, if the Fund 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
Fund could be required to sell the security upon exercise at a price below the
current market price. Similarly, if the Fund 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 Fund 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:
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. 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, the Fund 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
Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Fund 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the
issuer's common stock at the Fund's option during a specified time period
(such as convertible preferred stocks, convertible debentures and
warrants). A convertible security is generally a fixed income security that
is senior to common stock in an issuer's capital structure, but is usually
subordinated to similar non-convertible securities. 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. In
general, the market value of a convertible security is at least the higher
of its "investment value' (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock).
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. The price of
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a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying common stock declines.
A synthetic convertible security is a combination investment in which the
Fund purchases both (i) high-grade cash equivalents or a high grade debt
obligation of an issuer or U.S. Government securities and (ii) call options
or warrants on the common stock of the same or different issuer with some
or all of the anticipated interest income from the associated debt
obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a
similar non-convertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in
the capital appreciation attendant upon a market price advance in the
convertible security's underlying common stock. A synthetic convertible
position has similar investment characteristics, but may differ with
respect to credit quality, time to maturity, trading characteristics, and
other factors. Because the Fund will create synthetic convertible positions
only out of high grade fixed income securities, the credit rating
associated with the Fund's synthetic convertible investments is generally
expected to be higher than that of the average convertible security, many
of which are rated below high grade. However, because the options used to
create synthetic convertible positions will generally have expirations
between one month and three years of the time of purchase, the maturity of
these positions will generally be shorter than average for convertible
securities. Since the option component of a convertible security or
synthetic convertible position is a wasting asset (in the sense of losing
"time value" as maturity approaches), a synthetic convertible position may
lose such value more rapidly than a convertible security of longer
maturity; however, the gain in option value due to appreciation of the
underlying stock may exceed such time value loss, the market price of the
option component generally reflects these differences in maturities, and
the Adviser and applicable sub-adviser take such differences into account
when evaluating such positions. When a synthetic convertible position
"matures" because of the expiration of the associated option, the Fund may
extend the maturity by investing in a new option with longer maturity on
the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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
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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;
. 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
17
<PAGE>
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 Fund
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
18
<PAGE>
. 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 Fund ability to invest in
a particular country or make it very expensive for the Fund 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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient
as, those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum
rates, as opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Fund 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
19
<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 Fund to recover a
portion of these taxes, the portion that cannot be recovered will reduce
the income the Fund receive from its investments. The Fund do 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 Fund also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
Fund expect 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?
20
<PAGE>
INVESTMENT COMPANIES
--------------------------------------------------------------------------------
The Fund 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 Fund. Like other shareholders, the Fund would pay
its proportionate share of those fees. Consequently, shareholders of the Fund
would pay not only the management fees of the Fund, but also the management
fees of the investment company in which the Fund invests. The Fund 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 Fund in the UAM Complex 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 Fund's investment policies and restrictions; and
. The Fund's adviser waives any fees it earns on the assets of the Fund that
is invested in the UAM DSI Money Market Portfolio.
The Fund 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 Fund normally use repurchase agreements to earn income
on assets that are not invested.
When the Fund enter 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 Fund's right to sell the
security may be restricted. In addition, the value of the security might
decline before the Fund can sell it and the Fund might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Fund may purchase restricted securities that are not registered for sale
to the general public. The Fund may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Fund's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Fund
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Fund 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. If the Fund lend its securities,
it will follow the following guidelines:
21
<PAGE>
. 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 Fund
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 Fund lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Fund 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Fund can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Fund replace the
borrowed security. Likewise, the Fund can profit if the price of the security
declines between those dates.
To borrow the security, the Fund also may be required to pay a premium, which
would increase the cost of the security sold. The Fund will incur transaction
costs in effecting short sales. The Fund's gains and losses will be decreased
or increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Fund may be required to pay in connection with a
short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, the Fund may engage in short sales "against the box." In a
short sale against the box, the Fund agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no extra
cost. The Fund will incur transaction costs to open, maintain and close short
sales against the box.
Restrictions on Short Sales
The Fund will not short sell a security if:
22
<PAGE>
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Fund net assets.
. The market value of the securities of any single issuer that have been sold
short by the Fund would exceed the two percent (2%) of the value of the
Fund's net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Fund sell a security short, its custodian segregates an amount of
cash or liquid securities equal to the difference between (a) the market value
of the securities sold short at the time they were sold short and (b) any cash
or U.S. Government securities the Fund are required to deposit with the broker
in connection with the short sale (not including the proceeds from the short
sale). The segregated assets are marked to market daily in an attempt to
ensure that the amount deposited in the segregated account plus the amount
deposited with the broker is at least equal to the market value of the
securities at the time they were sold short.
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 Fund contract 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 Fund have
committed to purchase before the securities are delivered, although the Fund
may earn income on securities it has in a segregated account. The Fund 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 Fund would use 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 Fund engage 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 Fund 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 Fund assume 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 Fund do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the FUND
The Fund 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 Fund 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 that the
Fund cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Fund will not:
. Borrow money, except to the extent permitted by applicable law, as amended and
interpreted or modified from time to time by any regulatory authority having
jurisdiction and the guidelines set forth in a Fund's prospectus and statement
of additional information as they may be amended from time to time.
23
<PAGE>
. Issue senior securities, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933 in
connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by applicable
law, as amended and interpreted or modified from time to time by any
regulatory authority having jurisdiction, (2) that a Fund may invest in,
securities of issuers that deal or invest in real estate and (3) that a Fund
may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction and
the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall not
be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Fund may change
them without shareholder approval. The Fund may:
. purchase and sell currencies or securities on a when-issued, delayed delivery
or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency and
foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of its
investable assets in securities of a single open-end management investment
company with substantially the same investment objectives, policies and
limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Fund intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities, including
(1) treating as illiquid securities that may not be disposed of in the
ordinary course of business within 7 days at approximately the value at which
the portfolio has valued the investment on its books; and (2) limiting its
holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other institutional
investors. These loans may not exceed 33 1/3% of the portfolio's total assets
taken at market value. In addition, a Fund must receive at least 100%
collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
24
<PAGE>
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events per
year.
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting
fee and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Fund in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr. English
has an investment advisory relationship with Investment Counselors of
Maryland, an investment adviser to one of the Funds in the UAM Funds Complex.
However, the Company does not believe that the relationship is a material
business relationship, and, therefore, does not consider him to be an
interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Name, Address, Aggregate Total Compensation
Date of Birth Compensation from From UAM Funds
Company as of Complex as of
Principal Occupations During the Past 5 years 10/31/00 10/31/00
===================================================================================================================================
<C> <S> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management
RR2 Box 700 Company, Inc. and Great Island Investment Company, Inc.
Center Harbor, NH 03226 (investment management). From 1988 to 1993, Mr. Bennett was
1/26/29 President of Bennett Management Company. Mr. Bennett serves
on the Board of each Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn was
Washington, DC 20037 Vice President for Finance and Administration and Treasurer of
8/14/51 Radcliffe College (Education). Ms. Dunn serves on the Board of
each Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June 1998
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law firm
Dechert Price & Rhoads from July 1976 to June 1998. He was also
formerly a Director of Hofler Corp. (manufacturer of gear
grinding machines). Mr. Humenuk serves on the Board of each
Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Name, Address, Aggregate Total Compensation
Date of Birth Compensation from From UAM Funds
Company as of Complex as of
Principal Occupations During the Past 5 years 10/31/00 10/31/00
===================================================================================================================================
<C> <S> <C> <C>
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the investment
Baltimore, MD 21201 management business. He is also Chairman of the Board of Chektec
8/5/48 Corporation (Drugs) and Cyber Scientific, Inc. (computer mouse
company). Mr. English serves on the Board of each Company in the
UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since May
One International Place 2000; Chairman and Chief Executive Officer of UNUM Corporation 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee of Bates College and the
3/5/43 Committee for Economic Development; Chairman-elect of the Board
of Trustees of the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of Public Health; Director
of the Nashua Corporation and the National Alliance of Business.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides information
regarding their present positions, date of birth, address and their principal
occupations during the past five years. The Company's officers are paid by
UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, with the Fund as of the Fund Complex as
Date of Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
===================================================================================================================================
<C> <S> <C> <C> <C>
James F. Orr III* Board President, Chief Executive Officer and Director of 0 0
One International Place Member UAM since May 2000; Chairman and Chief Executive
Boston, MA 02110 President Officer of UNUM Corporation (Insurance) from 1988 to
3/5/43 1999; Trustee of Bates College and the Committee for
Economic Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for Society,
and the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua Corporation
and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer) since
April 2000; Senior Vice President and Secretary of
Signature Financial Group, Inc. (financial services)
and affiliated broker-dealers from 1991 to 2000;
Director and Secretary of Signature Financial Group
Europe, Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000; Secretary of the 59
Wall Street Family of Mutual Funds (mutual funds)
from 1996 to 2000.
------------------------------------------------------------------------------------------------------------------------------------
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
Position Compensation From Compensation From
Name, Address, with the Fund as of the Fund Complex as
Date of Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
====================================================================================================================================
<C> <S> <C> <C> <C>
Theresa DeVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer
of UAMFDI (broker-dealer) since February 2000;
Assistant Vice President of Scudder Kemper
Investments (financial services) from May 1992
to February 1998.
------------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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
-----------------------------------------------------------------------------------------------------------------------
<S> <C>
Stanford Management Company 41.37%
2770 Sandhill Road
Menlo Park, CA 94025-7070
-----------------------------------------------------------------------------------------------------------------------
Charles Schwab & CO INC 30.55%
Reinvest Account
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
-----------------------------------------------------------------------------------------------------------------------
University of Guelph 14.39%
FBO Dale Lockie
Pension Investments
University Centre LVL 5
Guelph, Ontario
Canada, NIG 2WI
</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 December 15,
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
--------------------------------------------------------------------------------
Acadian Asset Management, Inc., a Massachusetts corporation located at Ten
Post Office Square, Boston, Massachusetts 02109, is the investment adviser to
the Fund. The adviser manages and supervises the investment of the Fund'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. United
Asset Management Corporation is a wholly-owned subsidiary of Old Mutual plc, a
United Kingdom based financial services group.
27
<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 Company 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 the Fund's assets;
. Continuously reviews, supervises and administers the investment program of
the Fund; and
. Determines what portion of the Fund'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 Company, 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 Fund.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Fund'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.
28
<PAGE>
The adviser may terminate the Investment Advisory Agreement at any time,
without the payment of any penalty, upon 90 days' written notice to the
Company.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the Fund pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of the Fund. Due
to the effect of fee waivers by the adviser, the actual percentage of average
net assets that the Fund pay 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 Fund paid the following in management fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Paid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Acadian Emerging Markets Portfolio $
2000
------------------------------------------------------------------------------------------------------------------------------------
1999 $1,274,940
1998 $ 812,228
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for the Fund of the Company. The Company
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 Company or the Fund. 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 Fund.
ADMINISTRATIVE SERVICES
--------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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 Company. UAMFSI will pay such people for
such employment. The Company will not incur any obligations with respect to
such people. Other expenses incurred in the operation of the Company will be
borne by the Company 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.
29
<PAGE>
. 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 Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as follows:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of the Fund at the
following rates:
<TABLE>
<CAPTION>
Annual Rate
--------------------------------------------------------------------------------------------------------------------------
<S> <C>
Emerging Markets Portfolio 0.063%
</TABLE>
2. An annual fee to UAMFSI for sub-administration and other services, which
UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
30
<PAGE>
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Fund paid the following in administration
and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
-----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Acadian Emerging Markets Portfolio
2000
-----------------------------------------------------------------------------------------------------------------
1999 $89,112 $102,354 $191,466
1998 $31,634 $ 82,333 $113,967
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a code
of ethics under Rule 17j-1 of the 1940 Act that permits investment personnel
to purchase and sell securities for their personal account.
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 Fund. The Investment Agreement also directs the adviser to use its
best efforts to obtain the best execution with respect to all transactions for
the Fund. 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 Fund 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. Research services provided by brokers
through which the Fund effects securities transactions may be used by the
portfolio's investment adviser in servicing all of its accounts and not all of
these services may be used by the adviser in connection with the portfolio.
Such research include research reports on particular industries and companies,
economic surveys and analyses, recommendations as to specific securities and
other products or services (e.g., quotation equipment and computer related
costs and expenses), advice concerning the value of securities, the
advisability of investing in, purchasing or selling securities, the
availability of securities or the purchasers or sellers of securities,
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts,
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____ of
the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers or
dealers, as that term is defined in the 1940 Act.
31
<PAGE>
When allocating brokerage to brokers or effecting principal transactions with
dealers, the investment adviser may also consider the amount of portfolio
shares a broker-dealer has sold and the referral of other clients by the
broker to the adviser, subject to the requirements of best execution described
above. In addition, the portfolio may place trades with qualified broker-
dealers who recommend the portfolio or who act as agents in the purchase of
portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for the Fund 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 Fund, in a fair and reasonable manner. Although there
is no specified formula for allocating such transactions, the Company'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 Fund 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 Fund execute 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 two fiscal years, the portfolios paid the following in brokerage
commissions:
Brokerage Commissions
===========================================================================
Acadian Emerging Markets Portfolio
2000
---------------------------------------------------------------------------
1999 $574,983
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Company 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
Company is an non-diversified, open-end management company. This means that
with respect to 50% of its
32
<PAGE>
total assets, the Fund may not invest more than 5% of its total assets in
the securities of any one issuer (other than U.S. Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the
Company 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 Company. 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 Company's governing board.
If the Company is liquidated, the shareholders of the Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or
in the case of a class, belonging to that Fund and allocable to that class.
The Company will distribute is net assets to its shareholders in proportion
to the number of shares of that Fund or class thereof held by them and
recorded on the books of the Company. The liquidation of any Fund or class
thereof may be authorized at any time by vote of a majority of the members
of the governing board.
The Company will not hold annual meetings except when required to by the
1940 Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder
servicing and the distribution of such shares pursuant to a
distribution plan or other 12b-1 plan;
. Institutional Service 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; and
. Advisor 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.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
33
<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 Fund 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.
Each Fund send account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
FEDERAL TAXES
The Fund intend 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 it generally will be relieved of federal
income and excise taxes. If the Fund were to fail to make sufficient
distributions in a year, it would be subject to corporate income taxes
and/or excise taxes. In addition, if the shortfall were large enough, the
Fund could be disqualified as a regulated investment company. If a Fund was
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. Moreover, if a Fund was to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income
taxes and/or excise taxes in respect of the shortfall or, if the shortfall
is large enough, the Fund could be disqualified as a regulated investment
company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year
period ending October 31 of such calendar year and 100% of any such amounts
that were not distributed in the prior year. The Fund intend to make
sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar
year to avoid liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year if such dividends are actually paid during January
of the following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Fund is equal to the
NAV of its Fund. The Fund calculates its NAV 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
Fund, plus cash and other assets plus income accrued but not yet
received.
Each Fund 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
34
<PAGE>
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 it calculates
its NAV on the following business day. Service Agents are responsible to
their customers and the Company 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 the Fund. The Company will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Company 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 Fund shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares
of Fund the with securities, instead of cash. If the Company 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 Company
will issue shares of the Fund at the NAV of the Fund determined as of the
same time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-
kind purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Fund;
35
<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 Fund 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 Fund cannot exceed 5% of the
net assets of the Fund. 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 Fund investments.
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 Company 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 Company or UAMSSC may be
liable for any losses due to unauthorized or fraudulent telephone
instructions if the Company or the UAMSSC do not employ the procedures
described above. Neither the Company 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 Fund 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 have 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 Company 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 Company will pay for all shares redeemed under proper
procedures within seven days after it received your request. However, the
Company will pay your redemption proceeds earlier as applicable law so
requires.
The Company 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 SEC as a result of which it is not reasonably practicable for the
Fund to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the SEC may permit.
37
<PAGE>
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible
for the authenticity of the exchange instructions received by telephone.
The Board 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 other
mutual funds in the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Fund 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 Fund measure 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 Fund calculate their 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 Fund 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).
38
<PAGE>
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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of 10 Years or
One Year Five Years Since Inception Inception Date
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Acadian Emerging Markets Portfolio % % % 6/17/93
</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 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.
39
<PAGE>
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 Fund's October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Fund's Annual Report is
incorporated by reference herein. Shareholders may get copies of the Fund's
Annual Report 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 Fund.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of
the series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their Funds.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
40
<PAGE>
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.
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.
41
<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:
42
<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.
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.
43
<PAGE>
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.
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.
44
<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
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.
45
<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.
46
<PAGE>
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.
47
<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
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.
48
<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 Fund 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 Fund 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.
49
<PAGE>
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 Fund 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 Fund in equities. (Equity category)
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds that by
prospectus or Fund 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 Fund 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.
50
<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 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 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 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 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 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 Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500 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 Fund 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:
-------------------------------
51
<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 Fund. 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.
52
<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.
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.
53
<PAGE>
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 __, 2001
This statement of additional information (SAI) is not a prospectus.
However, you should read it in conjunction with the prospectus of the Funds
dated February __, 2001, as supplemented from time to time. You may obtain
the Funds' prospectus by contacting the UAM Funds at the address listed
above.
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
<S> <C>
Description of Permitted Investments................................. 1
Borrowing......................................................... 1
Debt Securities................................................... 1
Derivatives....................................................... 7
Equity Securities................................................. 15
Foreign Securities................................................ 17
Investment Companies.............................................. 20
Repurchase Agreements............................................. 21
Restricted Securities............................................. 21
Securities Lending................................................ 21
Short Sales....................................................... 22
When Issued Transactions.......................................... 22
Investment Policies of the Portfolios................................ 23
Fundamental Policies.............................................. 23
Non-Fundamental Policies.......................................... 24
Management of the Company............................................ 24
Board Members..................................................... 25
Officers.......................................................... 26
Principal Shareholders............................................... 26
Investment Advisory and Other Services............................... 26
Investment Adviser................................................ 28
Distributor....................................................... 29
Shareholder Servicing Arrangements................................ 30
Administrative Services........................................... 30
Custodian......................................................... 32
Independent Accountants........................................... 32
CODE OF ETHICS.................................................... 32
Brokerage Allocation and Other Practices............................. 32
Selection of Brokers.............................................. 32
Simultaneous Transactions......................................... 32
Brokerage Commissions............................................. 33
Capital Stock and Other Securities................................... 33
Purchase, Redemption and Pricing of Shares........................... 35
Net Asset Value Per Share......................................... 35
Purchase of Shares................................................ 36
Redemption of Shares.............................................. 37
Exchange Privilege................................................ 38
Transfer Of Shares................................................ 38
Performance Calculations............................................. 39
Total Return...................................................... 39
Yield............................................................. 39
Comparisons....................................................... 40
Financial Statements................................................. 40
Glossary............................................................. 40
Bond Ratings......................................................... 41
Moody's Investors Service, Inc.................................... 41
Standard & Poor's Ratings Services................................ 44
Duff & Phelps Credit Rating Co.................................... 46
Fitch IBCA Ratings................................................ 47
Comparative Benchmarks............................................... 48
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Funds' prospectus, the Funds may use a variety of
investment strategies in addition to its principal investment strategies.
This SAI describes each of these investments/strategies and their risks.
The Funds may not notify shareholders before employing new strategies,
unless it expects such strategies to become principal strategies. You can
find more information concerning the limits on the ability of the Funds to
use these investments in "Investment Policies of the Funds?"
BORROWING
--------------------------------------------------------------------------------
The Funds may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 331/3% of its total assets
(including the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the
extent permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss.
To mitigate the risks of leverage, the Fund will limit the amount it may
borrow to not more than 33 1/3% of its total assets, taken at market value.
In addition, the Funds will only borrow from banks as a temporary measure
for extraordinary or emergency purposes such as the redemption of Fund
shares. The Funds will not purchase securities while borrowings are
outstanding except to exercise prior commitments and to exercise
subscription rights.
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 "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.
1
<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 the Funds.
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 considered the equivalent of treasury securities and are
backed by the full faith and credit of the U.S. government. 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 Fund shares. To buy GNMA
securities, the Funds may have to pay a premium over the maturity value of
the underlying mortgages, which the Fund 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,
2
<PAGE>
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. For example, payments of
interest and principal are more frequent (usually monthly) and their
interest rates are sometimes adjustable. In addition, 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 Funds 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.
The Funds 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.
3
<PAGE>
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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
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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 Funds' 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 Funds may 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
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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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average
of the effective or anticipated maturity of each debt security held by the
mutual fund, with the maturity of each security weighted by the percentage
of the assets of the mutual fund 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.
The Funds 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 Funds. If
left unattended, drifts in the average maturity of the Funds can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
Funds.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Funds' average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Funds 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." If 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 Funds 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 Funds 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 Fund 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 Funds are not obligated to dispose of
securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The Fund may invest in
securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise
stated in the Funds' prospectus, the Funds may use derivatives to gain
exposure to various markets in a cost efficient manner, to reduce
transaction costs or to remain fully invested. The Funds may also invest in
derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Funds 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 Funds 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 or custodian bank, 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 Funds may incur commission expenses when it opens or closes a futures
position.
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 Funds 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 Funds 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 Funds 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
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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 Funds obtain the
right to purchase, rather than sell, the underlying instrument at the
option's strike price. The Funds would normally purchase call options in
anticipation of an increase in the market value of securities it owns or
wants to buy. The Funds 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
Funds 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 Funds 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 Funds write 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 Funds 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 Funds 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 Funds 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 Funds would hope to profit
by closing out the put option at a lower price. If security prices fall,
the Funds 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 Funds 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 Funds 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 Funds would expect the option to
expire and the premium it received to offset the decline of the security's
value. However, the Funds 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 Funds are permitted only to write covered options. At the time of
selling the call option, the Funds may cover the option by owning:
. 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.
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At the time of selling a put option, the Funds may cover the put option by:
. 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 Funds may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds.
Combined Positions
The Funds 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 Funds
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
Funds 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.
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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
Funds 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 Funds 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 Funds 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 Funds could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the Funds' 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds. If a swap agreement calls for payments by the Funds,
the Funds 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 Funds 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 Funds 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 Funds'
gains or losses. In order to reduce the risk associated with leveraging,
the Funds may cover its current obligations under swap agreements according
to guidelines established by the SEC. If the Funds 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 Funds' accrued obligations under
the swap agreement over the accrued amount the Funds are 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 Funds' 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 Funds 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, the Funds could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the Funds enter into a swap where it agrees to
exchange a floating rate of interest for a fixed rate of interest, the
Funds may have to pay more money than it receives. Similarly, if the Funds
enter into a swap where it agrees to exchange a fixed rate of interest for
a floating rate of interest, the Funds 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. The
Funds 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
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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 Funds than
if it had not entered into any derivatives transactions. Derivatives may
magnify the Funds' 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 Funds holds or intends to acquire should offset any losses incurred
with a derivative. Purchasing derivatives for purposes other than hedging
could expose the Funds to greater risks.
Correlation of Prices
The Funds' 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 Funds are 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 Funds' prediction of
interest and currency rates, market value, volatility or other economic
factors is incorrect, the Funds 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 Funds. A currency hedge, for example, should protect
a yen-denominated security from a decline in the yen, but will not protect
the Funds against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the Funds'
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 Funds' investments precisely over
time.
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Lack of Liquidity
Before a futures contract or option is exercised or expires, the Funds can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Funds may close out a futures contract only on the exchange
the contract was initially traded. Although the Funds intend 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 Funds may
not be able to close out its position. In an illiquid market, the Funds
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 Funds may lose money by investing in derivatives. For example, if the
Funds 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 Funds could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the Funds 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
Funds 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, the Funds 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
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immediate and substantial loss (as well as gain) to the Funds and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Funds may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Funds 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the
issuer's common stock at the Fund's option during a specified time period
(such as convertible preferred stocks, convertible debentures and
warrants). A convertible security is generally a fixed income security that
is senior to common stock in an issuer's capital structure, but is usually
subordinated to similar non-convertible securities. 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. In
general, the market value of a convertible security is at least the higher
of its "investment value' (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock).
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. The price of a convertible security tends to increase as
the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the
Fund purchases both (i) high-grade cash equivalents or a high grade debt
obligation of an issuer or U.S. Government securities and (ii) call options
or warrants on the common stock of the same or different issuer with some
or all of the anticipated interest income from the associated debt
obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a
similar non-convertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in
the capital appreciation attendant upon a market price advance in the
convertible security's underlying common stock. A synthetic convertible
position has similar investment characteristics, but may differ with
respect to credit quality, time to maturity, trading characteristics, and
other factors. Because the Fund will create synthetic convertible positions
only out of high grade fixed income securities, the credit rating
associated with the Fund's synthetic convertible investments is generally
expected to be higher than that of the average convertible security, many
of which are rated below high grade. However, because the options used to
create synthetic convertible positions will generally have expirations
between one month and three years of the time of
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purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset
(in the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences
in maturities, and the Adviser and applicable sub-adviser take such
differences into account when evaluating such positions. When a synthetic
convertible position "matures" because of the expiration of the associated
option, the Fund may extend the maturity by investing in a new option with
longer maturity on the common stock of the same or different issuer. If the
Fund does not so extend the maturity of a position, it may continue to hold
the associated fixed income security.
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
--------------------------------------------------------------------------------
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 Funds ability to invest in
a particular country or make it very expensive for the Funds 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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as,
those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum rates,
as opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. 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 Funds to recover
a portion of these taxes, the portion that cannot be recovered will reduce
the income the Funds receive from its investments. The Funds do 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;
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. 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 Funds also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
Funds expect 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 Funds 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 Funds. Like other shareholders, the Funds
would pay its proportionate share of those fees. Consequently, shareholders
of the Funds would pay not only the management fees of the Fund, but also
the management fees of the investment company in which the Fund invests.
The Funds 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 Funds in the UAM Complex 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 Funds' investment policies and restrictions; and
. The Funds' adviser waives any fees it earns on the assets of the Fund
that is invested in the UAM DSI Money Market Portfolio.
The Funds will bear expenses of the UAM DSI Money Market Portfolio on the
same basis as all of its other shareholders.
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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 Funds normally use repurchase agreements to earn
income on assets that are not invested.
When the Funds enter 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 Funds' right to sell the
security may be restricted. In addition, the value of the security might
decline before the Funds can sell it and the Funds might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Funds may purchase restricted securities that are not registered for
sale to the general public. The Funds may also purchase shares 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 may not be treated as illiquid securities for
purposes of the Funds' investment limitations. The price realized from the
sales of these securities could be more or less than those originally paid
by the Funds or less than what may be considered the fair value of such
securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Funds 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. If the Funds lend
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
Funds 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 Funds lend securities, there is a risk that the borrower will
become financially unable to honor its contractual obligations. If this
happens, the Funds 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.
21
<PAGE>
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does
not own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Funds can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
Funds replace the borrowed security. Likewise, the Funds can profit if the
price of the security declines between those dates.
To borrow the security, the Funds also may be required to pay a premium,
which would increase the cost of the security sold. The Funds will incur
transaction costs in effecting short sales. The Funds' gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the Funds may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, the Funds may engage in short sales "against the box." In a
short sale against the box, the Funds agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no
extra cost. The Funds will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
The Funds will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Funds net
assets.
. The market value of the securities of any single issuer that have been
sold short by the Funds would exceed the two percent (2%) of the value
of the Funds' net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever the Funds sell a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. Government securities the Funds are required to
deposit with the broker in connection with the short sale (not including
the proceeds from the short sale). The segregated assets are marked to
market daily in an attempt to ensure that the amount deposited in the
segregated account plus the amount deposited with the broker is at least
equal to the market value of the securities at the time they were sold
short.
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 Funds contract 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 Funds have committed to purchase
22
<PAGE>
before the securities are delivered, although the Funds may earn income on
securities it has in a segregated account. The Funds 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 Funds would use 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 Funds engage 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 Funds 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 Funds assume 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 Funds do not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
Investment Policies of the Funds
The Funds 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,
each Fund 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 that the
Funds cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Funds will not:
. Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This
restriction does not, however, apply to any portfolio classified as a
non-diversified series of an open-end investment company under the 1940
Act.
. Borrow money, except to the extent permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in a Fund's prospectus and
statement of additional information as they may be amended from time to
time.
. Issue senior securities, except to the extent permitted by applicable law,
as amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest
in, securities of issuers that deal or invest in real estate and (3) that a
Fund may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under
the Commodity Exchange Act.
23
<PAGE>
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Funds may
change them without shareholder approval. The Funds may:
. purchase and sell currencies or securities on a when-issued, delayed
delivery or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency
and foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of
its investable assets in securities of a single open-end management
investment company with substantially the same investment objectives,
policies and limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Funds intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities,
including (1) treating as illiquid securities that may not be disposed of
in the ordinary course of business within 7 days at approximately the value
at which the portfolio has valued the investment on its books; and (2)
limiting its holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other
institutional investors. These loans may not exceed 33 1/3% of the
portfolio's total assets taken at market value. In addition, a Fund must
receive at least 100% collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies
the Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events
per year.
24
<PAGE>
In addition, the Company reimburses each Independent Director for travel
and other expenses incurred while attending board meetings. The $3,000
meeting fee and expense reimbursements are aggregated for all of the
Directors and allocated proportionately among all Funds in the UAM Complex.
The Company does not pay its Interested Directors or officers for their
services as Directors or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr.
English has an investment advisory relationship with Investment Counselors
of Maryland, an investment adviser to one of the Funds in the UAM Funds
Complex. However, the Company does not believe that the relationship is a
material business relationship, and, therefore, does not consider him to be
an interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total
Compensation from Compensation From
Name, Address, Date of Company as of UAM Funds Complex
Birth Principal Occupations During the Past 5 years 10/31/00 as of 10/31/00
========================================================================================================================
<S> <C> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment
RR2 Box 700 Management Company, Inc. and Great Island
Center Harbor, NH 03226 Investment Company, Inc. (investment management).
1/26/29 From 1988 to 1993, Mr. Bennett was President of
Bennett Management Company. Mr. Bennett serves on
the Board of each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World
1250 24th St., NW Wildlife Fund (nonprofit), since January 1999.
Washington, DC 20037 From 1991 to 1999, Ms. Dunn was Vice President for
8/14/51 Finance and Administration and Treasurer of
Radcliffe College (Education). Ms. Dunn serves on
the Board of each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President
10401 N. Meridian St Administration, General Counsel and Secretary of
Suite 400 Lone Star Industries Inc. (cement and ready-mix
Indianapolis, IN 46290 concrete) since March 2000. From June 1998 to
4/21/42 March 2000 he was Executive Vice President and
Chief Administrative Officer of Philip Services
Corp. (ferrous scrap processing, brokerage and
industrial outsourcing services). Mr. Humenuk was
a Partner in the Philadelphia office of the law
firm Dechert Price & Rhoads from July 1976 to June
1998. He was also formerly a Director of Hofler
Corp. (manufacturer of gear grinding machines).
Mr. Humenuk serves on the Board of each Company in
the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------
Philip D. English Mr. English is President and Chief Executive
16 West Madison Street Officer of Broventure Company, Inc., a company
Baltimore, MD 21201 engaged in the investment management business. He
8/5/48 is also Chairman of the Board of Chektec
Corporation (Drugs) and Cyber Scientific, Inc.
(computer mouse company). Mr. English serves on
the Board of each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of
One International Place UAM since May 2000; Chairman and Chief Executive 0 0
Boston, MA 02110 Officer of UNUM Corporation (Insurance) from 1988
3/5/43 to 1999; Trustee of Bates College and the Committee
for Economic Development; Chairman-elect of the
Board of Trustees of the Rockefeller Foundation;
Member of The Business Roundtable, the Harvard
Center for Society, and the Health Advisory
Council at the Harvard School of Public Health;
Director of the Nashua Corporation and the
National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides
information regarding their present positions, date of birth, address and
their principal occupations during the past five years. The Company's
officers are paid by UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation From
Compensation From the Fund Complex
Name, Address, Date of Position Principal Occupations During the Past 5 the Fund as of as of October 31,
Birth with Fund years October 31, 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James F. Orr III* Board President, Chief Executive Officer and 0 0
One International Place Member Director of UAM since May 2000; Chairman
Boston, MA 02110 President and Chief Executive Officer of UNUM
3/5/43 Corporation (Insurance) from 1988 to
1999; Trustee of Bates College and the
Committee for Economic Development;
Chairman-elect of the Board of Trustees
of the Rockefeller Foundation; Member of
The Business Roundtable, the Harvard
Center for Society, and the Health
Advisory Council at the Harvard School of
Public Health; Director of the Nashua
Corporation and the National Alliance of
Business.
------------------------------------------------------------------------------------------------------------------------
Linda T. Gibson Secretary General Counsel and Managing Director of 0 0
211 Congress Street UAM Investment Services, Inc. (financial
Boston, MA 02110 services); Senior Vice President and
7/31/65 General Counsel of UAMFSI (financial
services) and UAMFDI (broker-dealer)
since April 2000; Senior Vice President
Group, Inc. (financial services) and
affiliated broker-dealers from 1991 to
2000; Director and Secretary of Signature
Financial Group Europe, Ltd. (financial
services) from 1995 to 2000; Secretary of
the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000;
Secretary of the 59 Wall Street Family of
Mutual Funds (mutual funds) from 1996 to
2000.
------------------------------------------------------------------------------------------------------------------------
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.
------------------------------------------------------------------------------------------------------------------------
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) 0 0
211 Congress Street Secretary since February 1998; Secretary and
Boston, MA 02110 Compliance Officer of UAMFDI
12/23/63 (broker-dealer) since February 2000;
Assistant Vice President of Scudder
Kemper Investments (financial services)
from May 1992 to February 1998.
------------------------------------------------------------------------------------------------------------------------
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 December 15, 2000, the following persons or organizations held of
record or beneficially 5% or more of the shares of a portfolio:
26
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
=========================================================================================================================
<S> <C> <C> <C>
Carole Bonner 24.77% C&B Balanced Institutional
1550 North 123/rd/ Street Portfolio Class Shares
Wauwatsoa, WI 53226-31312
-------------------------------------------------------------------------------------------------------------------------
Joanna H. Schoff 15.77% C&B Balanced Institutional
226 North Street Portfolio Class Shares
Rye, NY 10580-1520
-------------------------------------------------------------------------------------------------------------------------
UAM Trust Co.CUST. 13.84% C&B Balanced Institutional
William W. Beible, Jr. Portfolio Class Shares
611 Saint Lawrence Lane
Gibsonia, PA 15044-8025
-------------------------------------------------------------------------------------------------------------------------
UAM Trust Co. CUST 13.47% C&B Balanced Institutional
IRA A/C Douglas Wharton Mellor Portfolio Class Shares
1020 Mt. Pleasant Road
Bryn Mawr, PA 19010-1826
-------------------------------------------------------------------------------------------------------------------------
UAM Trust Co. CUST 8.33% C&B Balanced Institutional
IRA A/C Linda Carpino Portfolio Class Shares
496 Hollyknowll Drive
Churchville, PA 18966-1453
-------------------------------------------------------------------------------------------------------------------------
Helen A. Mohn 6.76% C&B Balanced Institutional
100 Vermillion Drive Portfolio Class Shares
Levittown, PA 19054-1324
-------------------------------------------------------------------------------------------------------------------------
First Union National Bank 33.73% C&B Equity Portfolio Institutional
FBO Cadmus Comm Corp Class Shares
1525 West WT Harris Blvd CMG NC 1151
Charlotte, NC 28262-8522
-------------------------------------------------------------------------------------------------------------------------
Ironworkers Local 397 Pension Fund 17.81% C&B Equity Portfolio Institutional
c/o Administrative Services Inc. Class Shares
Attn: Fund Accounting
PO Box 83900
Miami, FL 332839000
-------------------------------------------------------------------------------------------------------------------------
Central New York Community Foundation Inc. 18.78% C&B Equity Portfolio Institutional
500 S. Salina St. Ste 428 Class Shares
Syracuse, NY 13202-3314
-------------------------------------------------------------------------------------------------------------------------
A. Cirillo, D. Faicco, R. Samuels & 7.37% C&B Equity Portfolio Institutional
Joseph Guerrera & David Smith TR Class Shares
Fulton Fish Market PFA 7 DEC TR
PART Fulton Fish Market Pension 1/1/82
140 Beekman Street
New York, NY 10038-02010
-------------------------------------------------------------------------------------------------------------------------
S. Sanford Schlitt TOD 44.03% C&B Equity Portfolio Institutional
Subject to DST TOD Rules for Taxable Investors Class Shares
Patricia Schlitt PB
491 Meadow Lark Drive
Sarasota, FL 34236-1901
-------------------------------------------------------------------------------------------------------------------------
Ann Hauptman & Cynthia Jacobs TR FBO Gunther A. 16.50% C&B Equity Portfolio Institutional
Hauptman TR for Taxable Investors Class Shares
4 Briga Ln
White Plains, NY 10605-4647
-------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 12.35% C&B Equity Portfolio Institutional
Reinvest Account for Taxable Investors Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
-------------------------------------------------------------------------------------------------------------------------
Anne Y Stratton 6.35% C&B Equity Portfolio Institutional
9608 N. Juniper Circle for Taxable Investors Class Shares
Mequon, WI 53092-6216
-------------------------------------------------------------------------------------------------------------------------
Robert B. Arthur 5.75% C&B Equity Portfolio Institutional
101 Cheswold Lane, Apt. 4B for Taxable Investors Class Shares
Haverford, PA 19041-1867
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
=========================================================================================================================
<S> <C> <C> <C>
Vanguard Fiduciary Trust Co. FBO UAM Corp 81.53% C&B Mid Cap Equity Institutional
Profit Sharing 401K Plan, Portfolio Class Shares
Vanguard Fiduciary Trust Group Sp. Services
PO Box 2600 VM 421
Valley Forge, PA 19482-2600
-------------------------------------------------------------------------------------------------------------------------
UAM Trust CO CUST 6.14% C&B Mid Cap Equity Institutional
FBO John J. Medveckis R/O IRA Portfolio Class Shares
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
December 15, 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. United Asset Management Corporation is a wholly-owned subsidiary of
Old Mutual plc, a United Kingdom based financial services group.
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 Company 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 the Funds' assets;
. Continuously reviews, supervises and administers the investment program
of the Funds; and
28
<PAGE>
. Determines what portion of the Funds' 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 Company, 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 Funds.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Funds' 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
Company.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
Advisory Fees
For its services, the Funds pay its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of each
Fund. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that the Funds pay 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 Funds paid the following in management
fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Investment Advisory Total Investment
Fees Paid Fees Waived Advisory Fees
===============================================================================================================
<S> <C> <C> <C>
Balanced Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $105,758 $102,289 $ 3,469
---------------------------------------------------------------------------------------------------------------
1998 $ 70,255 $ 67,927 $ 2,328
---------------------------------------------------------------------------------------------------------------
Equity Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $677,029 $ 0 $677,029
---------------------------------------------------------------------------------------------------------------
1998 $966,726 $ 0 $966,726
---------------------------------------------------------------------------------------------------------------
Mid Cap Equity Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $ 0 $ 8,217 $ 0
---------------------------------------------------------------------------------------------------------------
1998 $ 0 $ 3,589 $ 0
---------------------------------------------------------------------------------------------------------------
Equity Portfolio For Taxable Investors
2000
---------------------------------------------------------------------------------------------------------------
1999 $ 0 $ 23,723 $ 0
---------------------------------------------------------------------------------------------------------------
1998 $ 0 $ 16,532 $ 0
---------------------------------------------------------------------------------------------------------------
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for each Fund of the Company. The Company
offers its shares continuously. While UAMFDI will use its best efforts to
sell shares of the Funds, 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.
29
<PAGE>
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 Company
or the Funds. 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 Funds.
ADMINISTRATIVE SERVICES
--------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of
its services under the Fund Administration Agreement. UAMFSI may, at its
own expense, 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 Company. UAMFSI will pay
such people for such employment. The Company will not incur any obligations
with respect to such people. Other expenses incurred in the operation of
the Company will be borne by the Company 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 Funds.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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,
30
<PAGE>
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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as
follows:
. $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 Fund 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. An annual fee to UAMFSI for sub-administration and other services,
which UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Funds paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
======================================================================================================================
<S> <C> <C> <C>
Balanced Portfolio
2000
----------------------------------------------------------------------------------------------------------------------
1999 $18,964 $58,849 $77,813
1998 $16,107 $79,810 $95,917
----------------------------------------------------------------------------------------------------------------------
Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------------------
1999 $54,969 $ 94,088 $149,057
1998 $31,273 $145,022 $176,295
----------------------------------------------------------------------------------------------------------------------
Mid Cap Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------------------
1999 $8,500 $40,291 $48,791
1998 $1,690 $23,821 $25,511
----------------------------------------------------------------------------------------------------------------------
Equity Portfolio For Taxable
Investors
2000
----------------------------------------------------------------------------------------------------------------------
1999 $6,592 $57,574 $64,166
1998 $3,684 $61,533 $65,217
</TABLE>
31
<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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a
code of ethics under Rule 17j-1 of the 1940 Act that permits investment
personnel to purchase and sell securities for their personal account.
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 Funds. The Investment Agreement also directs the adviser
to use its best efforts to obtain the best execution with respect to all
transactions for the Funds. 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 Funds 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. Research services provided by brokers through which the Fund
effects securities transactions may be used by the portfolio's investment
adviser in servicing all of its accounts and not all of these services may
be used by the adviser in connection with the portfolio. Such research
include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs
and expenses), advice concerning the value of securities, the advisability
of investing in, purchasing or selling securities, the availability of
securities or the purchasers or sellers of securities, furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy and performance of accounts, effecting
securities transactions and performing functions incidental thereto (such
as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____
of the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers
or dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions
with dealers, the investment adviser may also consider the amount of
portfolio shares a broker-dealer has sold and the referral of other clients
by the broker to the adviser, subject to the requirements of best execution
described above. In addition, the portfolio may place trades with qualified
broker-dealers who recommend the portfolio or who act as agents in the
purchase of portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for each Fund 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
32
<PAGE>
such transactions among its clients, including the Funds, in a fair and
reasonable manner. Although there is no specified formula for allocating
such transactions, the Company'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 Funds 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 Funds execute
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 two fiscal years, the portfolios paid the following in
brokerage commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
=====================================================================================================================
<S> <C>
Balanced Portfolio
---------------------------------------------------------------------------------------------------------------------
2000
---------------------------------------------------------------------------------------------------------------------
1999 $ 13,851
---------------------------------------------------------------------------------------------------------------------
Equity Portfolio
---------------------------------------------------------------------------------------------------------------------
2000
---------------------------------------------------------------------------------------------------------------------
1999 $201,243
---------------------------------------------------------------------------------------------------------------------
Mid Cap Equity Portfolio
2000
---------------------------------------------------------------------------------------------------------------------
1999 $ 4,754
---------------------------------------------------------------------------------------------------------------------
Equity Portfolio For Taxable Investors
2000
---------------------------------------------------------------------------------------------------------------------
1999 $ 2,287
</TABLE>
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed
its name to "The Regis Fund, Inc." On October 31, 1995, the Company 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 Company is an diversified, open-end management company. This means
that with respect to 75% of its total assets, the Funds may not invest more
than 5% of its total assets in the securities of any one issuer (other than
U.S. Government Securities).
Description Of Shares And Voting Rights
The Company'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
33
<PAGE>
(portfolios) or classes of shares of common stock and to classify or
reclassify any unissued shares at any time and without shareholder
approval.
Description of Shares
When issued and paid for, the shares of each series and class of the
Company 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 Company. 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 Company's governing board.
If the Company is liquidated, the shareholders of each Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or
in the case of a class, belonging to that Fund and allocable to that class.
The Company will distribute is net assets to its shareholders in proportion
to the number of shares of that Fund or class thereof held by them and
recorded on the books of the Company. The liquidation of any Fund or class
thereof may be authorized at any time by vote of a majority of the members
of the governing board.
The Company will not hold annual meetings except when required to by the
1940 Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing
and the distribution of such shares pursuant to a distribution plan or
other 12b-1 plan;
. Institutional Service 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; and
. Advisor 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.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Funds at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the Funds at
least three days before the record date for income dividend or capital gain
distribution.
34
<PAGE>
Each Fund send account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
FEDERAL TAXES
The Funds intend 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 it generally will be relieved of federal
income and excise taxes. If the Fund were to fail to make sufficient
distributions in a year, it would be subject to corporate income taxes
and/or excise taxes. In addition, if the shortfall were large enough, the
Funds could be disqualified as a regulated investment company. If a Fund
was 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. Moreover, if a Fund was to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income
taxes and/or excise taxes in respect of the shortfall or, if the shortfall
is large enough, the Fund could be disqualified as a regulated investment
company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year
period ending October 31 of such calendar year and 100% of any such amounts
that were not distributed in the prior year. The Funds intend to make
sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar
year to avoid liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year if such dividends are actually paid during January
of the following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
Purchase, Redemption and Pricing Of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Funds is equal to
the NAV of its Fund. The Fund calculates its NAV 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
Fund, plus cash and other assets plus income accrued but not yet
received.
Each Fund 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
35
<PAGE>
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
Funds must receive proper payment for the order by the time it calculates
its NAV on the following business day. Service Agents are responsible to
their customers and the Company 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 the Funds. The Company will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Company 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 Funds' shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares
of Funds the with securities, instead of cash. If the Company 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 Company
will issue shares of the Funds at the NAV of the Fund determined as of the
same time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept
in-kind purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Funds;
. 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 Funds and are delivered to
the Funds 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 Funds cannot exceed 5% of the
net assets of the Funds. 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.
36
<PAGE>
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 Funds' investments.
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 Company 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 Company or UAMSSC may be
liable for any losses due to unauthorized or fraudulent telephone
instructions if the Company or the UAMSSC do not employ the procedures
described above. Neither the Company 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 Funds to make payment wholly or
partly in cash, the Funds may pay redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by the Funds 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 Funds have 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 Funds 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 Funds.
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 Company requires signature guarantees for certain types of documents,
including:
. Written requests for redemption;
37
<PAGE>
. 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 Company will pay for all shares redeemed under proper
procedures within seven days after it received your request. However, the
Company will pay your redemption proceeds earlier as applicable law so
requires.
The Company 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 SEC as a result of which it is not reasonably practicable for the
Fund to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the SEC may permit.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible
for the authenticity of the exchange instructions received by telephone.
The Board 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 other
mutual funds in the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Funds to another person by making a
written request to the Funds. 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 Funds measure 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 Funds calculate their
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 Funds 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 Funds 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, 2000 and the
shorter of the ten-year period ended October 31, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of 10 Years 30- Day
One Year Five Years or Since Inception Yield Inception Date
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Equity Portfolio
---------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
---------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio
---------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
</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.
39
<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 Funds' October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Funds' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the Funds'
Annual Reports free of charge by calling the UAM Funds at the telephone
number appearing on the front page of this SAI.
40
<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 Funds.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of
the series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their Funds.
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.
41
<PAGE>
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.
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.
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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.
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.
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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.
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.
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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.
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
45
<PAGE>
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
BB+/BB/ in risk during economic cycles. Below investment grade but
BB- deemed likely to meet 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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<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)
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.
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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.
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.
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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)
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.
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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.
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.
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<PAGE>
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.
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.
52
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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.
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.
53
<PAGE>
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 DSI Portfolios
DSI Limited Maturity Bond Portfolio
DSI Money Market Portfolio
DSI Small Cap Value Portfolio
Institutional Class Shares
Statement of Additional Information
February __, 2001
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the Funds dated
February __, 2001, as supplemented from time to time. You may obtain the
Funds' prospectus by contacting the UAM Funds at the address listed above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments.................................................... 1
Borrowing............................................................................. 1
Debt Securities....................................................................... 1
Derivatives........................................................................... 7
Equity Securities..................................................................... 15
Foreign Securities.................................................................... 17
Investment Companies.................................................................. 21
Repurchase Agreements................................................................. 21
Restricted Securities................................................................. 21
Securities Lending.................................................................... 22
Short Sales........................................................................... 22
When Issued Transactions.............................................................. 23
Investment Policies of the Funds........................................................ 23
Fundamental Policies.................................................................. 24
Non-Fundamental Policies.............................................................. 24
Management of the Company............................................................... 25
Board Members......................................................................... 25
Officers.............................................................................. 26
Principal Shareholders.................................................................. 27
Investment Advisory and Other Services.................................................. 28
Investment Adviser.................................................................... 28
Distributor........................................................................... 32
Shareholder Servicing Arrangements.................................................... 32
Service And Distribution Plans (DSI Disciplined Value Portfolio only)................. 32
Administrative Services............................................................... 34
Custodian............................................................................. 36
Independent Accountants............................................................... 36
CODE OF ETHICS........................................................................ 36
Brokerage Allocation and Other Practices................................................ 36
Selection of Brokers.................................................................. 36
Simultaneous Transactions............................................................. 37
Brokerage Commissions................................................................. 37
Capital Stock and Other Securities...................................................... 38
Purchase, Redemption and Pricing of Shares.............................................. 40
Net Asset Value Per Share............................................................. 40
Purchase of Shares.................................................................... 41
Redemption of Shares.................................................................. 41
Exchange Privilege.................................................................... 43
Transfer Of Shares.................................................................... 43
Performance Calculations................................................................ 43
Total Return.......................................................................... 44
Yield................................................................................. 44
Comparisons........................................................................... 45
Financial Statements.................................................................... 45
Glossary................................................................................ 45
Bond Ratings............................................................................ 46
Moody's Investors Service, Inc........................................................ 46
Standard & Poor's Ratings Services.................................................... 49
Duff & Phelps Credit Rating Co........................................................ 51
Fitch IBCA Ratings.................................................................... 52
Comparative Benchmarks.................................................................. 53
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Funds' prospectus, the Funds may use a variety of
investment strategies in addition to its principal investment strategies. This
SAI describes each of these investments/strategies and their risks. The Funds
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. You can find more information
concerning the limits on the ability of the Funds to use these investments in
"Investment Policies of the Funds?"
BORROWING
--------------------------------------------------------------------------------
The Funds may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 33 1/3% of its total assets
(including the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss. To
mitigate the risks of leverage, the Fund will limit the amount it may borrow
to not more than 33 1/3% of its total assets, taken at market value. In
addition, the Funds will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
The Funds will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
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 "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.
1
<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 the Funds.
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
considered the equivalent of treasury securities and are backed by the full
faith and credit of the U.S. government. 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 Fund shares. To buy GNMA securities, the Funds may have to pay a
premium over the maturity value of the underlying mortgages, which the Fund
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.
2
<PAGE>
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. For example, payments of
interest and principal are more frequent (usually monthly) and their interest
rates are sometimes adjustable. In addition, 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 Funds 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.
The Funds 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.
3
<PAGE>
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Funds 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 Funds 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
Funds 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 Funds 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 Funds may invest in commercial
4
<PAGE>
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 Funds' 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 Funds may record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
5
<PAGE>
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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Funds
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 Funds. If left unattended,
drifts in the average maturity of the Funds can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Funds.
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Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Funds' average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Funds 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." If 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 Funds 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 Funds 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 Fund 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 Funds are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise stated
in the Funds' prospectus, the Funds may use derivatives to gain exposure to
various markets in a cost efficient manner,
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to reduce transaction costs or to remain fully invested. The Funds may also
invest in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Funds 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 Funds
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 or custodian bank, 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 Funds may incur commission expenses when it opens or closes a futures
position.
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 Funds 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 Funds 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 Funds 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 Funds obtain the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The Funds would normally purchase call options in anticipation
of an increase in the market value of securities it owns or wants to buy. The
Funds 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 Funds 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 Funds 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 Funds
write 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 Funds 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 Funds 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 Funds 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 Funds would hope to profit by
closing out the put option at a lower price. If security prices fall, the
Funds 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 Funds 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 Funds 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 Funds would expect the option to expire and
the premium it received to offset the decline of the security's value.
However, the Funds 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 Funds are permitted only to write covered options. At the time of selling
the call option, the Funds may cover the option by owning:
. 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;
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. 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.
At the time of selling a put option, the Funds may cover the put option by:
. 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
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 Funds may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds.
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Combined Positions
The Funds 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 Funds
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
Funds 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
Funds 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 Funds 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 Funds 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 Funds could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the Funds' 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 Funds 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 Funds 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
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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 Funds 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 Funds 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 Funds 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 Funds 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 Funds. If a swap agreement calls for payments by the Funds,
the Funds 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 Funds 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 Funds 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 Funds'
gains or losses. In order to reduce the risk associated with leveraging,
the Funds may cover its current obligations under swap agreements according
to guidelines established by the SEC. If the Funds 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 Funds' accrued obligations under
the swap agreement over the accrued amount the Funds are 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 Funds' 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 Funds 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, the Funds could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the Funds enter into a swap where it agrees to
exchange a floating rate of interest for a fixed rate of interest, the
Funds may have to pay more money than it receives. Similarly, if the Funds
enter into a swap where it agrees to exchange a fixed rate of interest for
a floating rate of interest, the Funds 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. The
Funds 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 Funds than
if it had not entered into any derivatives transactions. Derivatives may
magnify the Funds' 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 Funds holds or intends to acquire should offset any losses incurred
with a derivative. Purchasing derivatives for purposes other than hedging
could expose the Funds to greater risks.
Correlation of Prices
The Funds' 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 Funds are 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 Funds' prediction of
interest and currency rates, market value, volatility or other economic
factors is incorrect, the Funds 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 Funds. A currency hedge, for example, should protect
a yen-denominated security from a decline in the yen, but will not protect
the Funds against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the Funds' 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 Funds' investments precisely over
time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Funds can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Funds may close out a futures contract only on the exchange
the contract was initially traded. Although the Funds intend 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 Funds may
not be able to close out its position. In an illiquid market, the Funds
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 Funds may lose money by investing in derivatives. For example, if the
Funds 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 Funds could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the Funds 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
Funds 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:
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. 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, the Funds 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
Funds and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Funds may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Funds 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the
issuer's common stock at the Fund's option during a specified time period
(such as convertible preferred stocks, convertible debentures and
warrants). A convertible security is generally a fixed income security that
is senior to common stock in an issuer's capital structure, but is usually
subordinated to similar non-convertible securities. 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. In
general, the market value of a convertible security is at least the higher
of its "investment value' (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock).
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of
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a convertible security is more volatile during times of steady interest
rates than other types of debt securities. The price of a convertible
security tends to increase as the market value of the underlying stock
rises, whereas it tends to decrease as the market value of the underlying
common stock declines.
A synthetic convertible security is a combination investment in which the
Fund purchases both (i) high-grade cash equivalents or a high grade debt
obligation of an issuer or U.S. Government securities and (ii) call options
or warrants on the common stock of the same or different issuer with some
or all of the anticipated interest income from the associated debt
obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a
similar non-convertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in
the capital appreciation attendant upon a market price advance in the
convertible security's underlying common stock. A synthetic convertible
position has similar investment characteristics, but may differ with
respect to credit quality, time to maturity, trading characteristics, and
other factors. Because the Fund will create synthetic convertible positions
only out of high grade fixed income securities, the credit rating
associated with the Fund's synthetic convertible investments is generally
expected to be higher than that of the average convertible security, many
of which are rated below high grade. However, because the options used to
create synthetic convertible positions will generally have expirations
between one month and three years of the time of purchase, the maturity of
these positions will generally be shorter than average for convertible
securities. Since the option component of a convertible security or
synthetic convertible position is a wasting asset (in the sense of losing
"time value" as maturity approaches), a synthetic convertible position may
lose such value more rapidly than a convertible security of longer
maturity; however, the gain in option value due to appreciation of the
underlying stock may exceed such time value loss, the market price of the
option component generally reflects these differences in maturities, and
the Adviser and applicable sub-adviser take such differences into account
when evaluating such positions. When a synthetic convertible position
"matures" because of the expiration of the associated option, the Fund may
extend the maturity by investing in a new option with longer maturity on
the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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
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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
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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;
. 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
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<PAGE>
. 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 Funds ability to invest in
a particular country or make it very expensive for the Funds 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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient
as, those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum
rates, as opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. 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 Funds to recover
a portion of these taxes, the portion that cannot be recovered will reduce
the income the Funds receive from its investments. The Funds do 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 Funds also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
Funds expect 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?
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INVESTMENT COMPANIES
--------------------------------------------------------------------------------
The Funds 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 Funds. Like other shareholders, the Funds
would pay its proportionate share of those fees. Consequently, shareholders
of the Funds would pay not only the management fees of the Fund, but also
the management fees of the investment company in which the Fund invests.
The Funds 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 Funds in the UAM Complex 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 Funds' investment policies and restrictions; and
. The Funds' adviser waives any fees it earns on the assets of the Fund
that is invested in the UAM DSI Money Market Portfolio.
The Funds 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 Funds normally use repurchase agreements to earn
income on assets that are not invested.
When the Funds enter 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 Funds' right to sell the
security may be restricted. In addition, the value of the security might
decline before the Funds can sell it and the Funds might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Funds may purchase restricted securities that are not registered for
sale to the general public. The Funds may also purchase shares 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 may not be treated as illiquid securities for
purposes of the Funds' investment limitations. The price realized from the
sales of these securities could be more or less than those originally paid
by the Funds or less than what may be considered the fair value of such
securities.
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<PAGE>
SECURITIES LENDING
--------------------------------------------------------------------------------
The Funds 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. If the Funds lend
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
Funds 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 Funds lend securities, there is a risk that the borrower will
become financially unable to honor its contractual obligations. If this
happens, the Funds 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does
not own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Funds can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
Funds replace the borrowed security. Likewise, the Funds can profit if the
price of the security declines between those dates.
To borrow the security, the Funds also may be required to pay a premium,
which would increase the cost of the security sold. The Funds will incur
transaction costs in effecting short sales. The Funds' gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the Funds may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
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Short Sales Against the Box
In addition, the Funds may engage in short sales "against the box." In a
short sale against the box, the Funds agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no
extra cost. The Funds will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
The Funds will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Funds net
assets.
. The market value of the securities of any single issuer that have been
sold short by the Funds would exceed the two percent (2%) of the value
of the Funds' net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever the Funds sell a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. Government securities the Funds are required to
deposit with the broker in connection with the short sale (not including
the proceeds from the short sale). The segregated assets are marked to
market daily in an attempt to ensure that the amount deposited in the
segregated account plus the amount deposited with the broker is at least
equal to the market value of the securities at the time they were sold
short.
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 Funds contract 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 Funds have committed to purchase before the
securities are delivered, although the Funds may earn income on securities
it has in a segregated account. The Funds 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 Funds would use 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 Funds engage 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
Funds 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 Funds assume 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 Funds do not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
Investment Policies of the Funds
The Funds 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
Funds 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 that the
Funds cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Funds will not:
. With respect to McKee Small Cap Equity Portfolio, make any investment
inconsistent with its classification as a diversified series of an
open-end investment company under the 1940 Act. This restriction does
not, however, apply to any portfolio classified as a non-diversified
series of an open-end investment company under the 1940 Act.
. Borrow money, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any
regulatory authority having jurisdiction and the guidelines set forth
in a Fund's prospectus and statement of additional information as they
may be amended from time to time.
. Issue senior securities, except to the extent permitted by applicable
law, as amended and interpreted or modified from time to time by any
regulatory authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio
may technically be deemed to be an underwriter under the Securities
Act of 1933 in connection with the purchase or sale of its portfolio
securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry
(other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to
time by any regulatory authority having jurisdiction, (2) that a Fund
may invest in, securities of issuers that deal or invest in real
estate and (3) that a Fund may purchase securities secured by real
estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a
Fund may engage in financial futures contracts and related options and
currency contracts and related options and may otherwise do so in
accordance with applicable law and without registering as a commodity
pool operator under the Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and
interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in a portfolio's
prospectus and statement of additional information as they may be
amended from time to time. The acquisition of investment securities or
other investment instruments shall not be deemed to be the making of a
loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Funds
may change them without shareholder approval. The Funds may:
. purchase and sell currencies or securities on a when-issued, delayed
delivery or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign
currency and foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all
of its investable assets in securities of a single open-end management
investment company with substantially the same investment objectives,
policies and limitations.
. invest in illiquid and restricted securities to the extent permitted
by applicable law. The Funds intends to follow the policies of the SEC
as they are adopted from time to time with respect to illiquid
securities, including (1) treating as illiquid securities that may not
be disposed of in the ordinary course of business within 7 days at
approximately the value at which the portfolio has valued the
investment on its books; and (2) limiting its holdings of such
securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted
by applicable law.
24
<PAGE>
. invest up to 10% of its total assets in the securities of other
investment companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other
institutional investors. These loans may not exceed 33 1/3% of the
portfolio's total assets taken at market value. In addition, a Fund
must receive at least 100% collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies
the Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events
per year.
In addition, the Company reimburses each Independent Director for travel
and other expenses incurred while attending board meetings. The $3,000
meeting fee and expense reimbursements are aggregated for all of the
Directors and allocated proportionately among all Funds in the UAM Complex.
The Company does not pay its Interested Directors or officers for their
services as Directors or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr.
English has an investment advisory relationship with Investment Counselors
of Maryland, an investment adviser to one of the Funds in the UAM Funds
Complex. However, the Company does not believe that the relationship is a
material business relationship, and, therefore, does not consider him to be
an interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
====================================================================================================================================
<S> <C> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management
RR2 Box 700 Company, Inc. and Great Island Investment Company, Inc.
Center Harbor, NH 03226 (investment management). From 1988 to 1993, Mr. Bennett was
1/26/29 President of Bennett Management Company. Mr. Bennett
serves on the Board of each Company in the UAM Funds
Complex.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn
Washington, DC 20037 was Vice President for Finance and Administration and
8/14/51 Treasurer of Radcliffe College (Education). Ms. Dunn serves on
the Board of each Company in the UAM Funds Complex.
-------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June
Indianapolis, IN 46290 1998 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law
firm Dechert Price & Rhoads from July 1976 to June 1998. He
was also formerly a Director of Hofler Corp. (manufacturer of
gear grinding machines). Mr. Humenuk serves on the Board of
each Company in the UAM Funds Complex.
-------------------------------------------------------------------------------------------------------------------------------
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the
Baltimore, MD 21201 investment management business. He is also Chairman of the
8/5/48 Board of Chektec Corporation (Drugs) and Cyber Scientific, Inc.
(computer mouse company). Mr. English serves on the Board of
each Company in the UAM Funds Complex.
-------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since
One International Place May 2000; Chairman and Chief Executive Officer of UNUM 0 0
Boston, MA 02110 Corporation (Insurance) from 1988 to 1999; Trustee of Bates
3/5/43 College and the Committee for Economic Development;
Chairman-elect of the Board of Trustees of the Rockefeller
Foundation; Member of The Business Roundtable, the Harvard
Center for Society, and the Health Advisory Council at the
Harvard School of Public Health; Director of the Nashua
Corporation and the National Alliance of Business.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides
information regarding their present positions, date of birth, address and
their principal occupations during the past five years. The Company's
officers are paid by UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years of October 31, 1999 of October 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James F. Orr III* Board President, Chief Executive Officer and Director of 0 0
One International Place Member UAM since May 2000; Chairman and Chief
Boston, MA 02110 President Executive Officer of UNUM Corporation
3/5/43 (Insurance) from 1988 to 1999; Trustee of Bates
College and the Committee for Economic
Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of
The Business Roundtable, the Harvard Center for
Society, and the Health Advisory Council at the
Harvard School of Public Health; Director of the
Nashua Corporation and the National Alliance of
Business.
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years of October 31, 1999 of October 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer)
since April 2000; Senior Vice President and
Secretary of Signature Financial Group, Inc.
(financial services) and affiliated broker-dealers
from 1991 to 2000; Director and Secretary of
Signature Financial Group Europe, Ltd. (financial
services) from 1995 to 2000; Secretary of the
Citigroup Family of Mutual Funds (mutual funds)
from 1996 to 2000; Secretary of the 59 Wall Street
Family of Mutual Funds (mutual funds) from 1996
to 2000.
--------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer of 0 0
211 Congress Street the Fidelity Group of Mutual Funds from 1991 to
Boston, MA 02110 1995; held various other offices with Fidelity
7/4/51 Investments from November 1990 to March 1995.
-------------------------------------------------------------------------------------------------------------------------------
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer
Boston, MA 02110 of UAMFDI (broker-dealer) since February 2000;
12/23/63 Assistant Vice President of Scudder Kemper
Investments (financial services) from May 1992 to
February 1998.
--------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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>
Jupiter & CO 72.66% DSI Limited Institutional
c/o Investors Bank & Trust CO Maturity Bond Class Shares
PO Box 9130 Portfolio
Boston, MA 02117-9130
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
================================================================================================================================
<S> <C> <C> <C>
Hometown Trust LLP 7.85% DSI Limited Institutional
364 Railroad Street Maturity Bond Class Shares
PO Box 219 Portfolio
St. Johnsbury, VT 058198-0219
--------------------------------------------------------------------------------------------------------------------------------
Saturn & CO 50.31% DSI Money Market Institutional
c/o Investors Bank and Trust Portfolio Class Shares
PO Box 9130 FPG90
Boston, MA 02117-9130
--------------------------------------------------------------------------------------------------------------------------------
UMBSC & Co 12.08% DSI Money Market Institutional
FBO Interstate Brands Conservative Growth Portfolio Class Shares
PO Box 419175
Kansas City, MO 64141-6175
--------------------------------------------------------------------------------------------------------------------------------
C.N.A. Trust Corporation TR 5.49% DSI Money Market Institutional
FBO Cardiovascular & Chest Portfolio Class Shares
Surgical Associates MPP
PO Box 5024
Costa Mesa, CA 92628-5024
--------------------------------------------------------------------------------------------------------------------------------
South Alaska Defined Contribution Pension Plan 6.72% DSI Money Market Institutional
Attn: Royce R. Rock Portfolio Class Shares
PO Box 241266
Anchorage, AK 99524-1266
--------------------------------------------------------------------------------------------------------------------------------
Fleet National Bank CUST 7.03% DSI Small Cap Value Institutional
FBO Diddcesan Investment Trust Portfolio Class Shares
Episcopal Diocese of RI
PO Box 92800
Rochester, NY 14692-8900
--------------------------------------------------------------------------------------------------------------------------------
Jupiter & CO 64.89% DSI Small Cap Value Institutional
c/o Investors Bank & Trust CO Portfolio Class Shares
PO Box 9130
Boston, MA 02117-9130
</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
December 15, 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 ("DSI"), 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. United Asset Management Corporation is a wholly-owned subsidiary of
Old Mutual plc, a United Kingdom based financial services group.
DSI has entered in to an agreement with Dwight Asset Management Company
("Dwight"), also a subsidiary of UAM, whereby DSI will be merged into
Dwight. A shareholder meeting will be held on December 29, 2000 to approve
a new investment advisory agreement with Dwight on behalf of DSI Limited
Maturity Bond and Money Market Portfolios. Dwight was founded in 1984 by
John K. Dwight and joined UAM in 1994. Dwight specializes in the management
of stable value portfolios for defined contribution plans.
Each 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
28
<PAGE>
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.
The Board of the Company has approved a new investment advisory agreement
on behalf of DSI Small Cap Value Portfolio with Independence Investment
Associates, Inc. ("Independence"). Independence, with offices at 53 State
Street, Boston, Massachusetts, is a wholly-owned subsidiary of John Hancock
Financial Services, Inc. A shareholder meeting will be held January 31,
2001 to approve a new investment advisory agreement.
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
<TABLE>
<CAPTION>
Name & Title Experience
===========================================================================================================================
<S> <C>
Charles Glovsky, CFA Mr. Glovsky joined the adviser in December 2000 as a ____. He joined Dewey Square
_______________ Investors Corporation as a Senior Portfolio Manager in 1998. Most recently, he was a
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.
Limited Maturity Bond and Money Market Portfolios
Name & Title Experience
===========================================================================================================================
Frederick C. Meltzer, PHD Mr. Meltzer joined the adviser in December 20000 as a _____. He joined Dewey Square
Senior Portfolio Manager, Investors Corproration as a Senior 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 in December 20000 as a _____. He joined Dewey
Senior Portfolio Manager, Square Investors Corproration 1997 as a 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.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Name & Title Experience
===========================================================================================================================
<S> <C>
</TABLE>
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Company 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 the Funds' assets;
. Continuously reviews, supervises and administers the investment
program of the Funds; and
. Determines what portion of the Funds' 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 Company, 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 Funds.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Funds' 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
Company.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
Advisory Fees
For its services, the Funds pay its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of each
Fund. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that the Funds pay 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 Funds paid the following in management
fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees
Investment Advisory Fees Paid Waived Total Investment Advisory Fees
===============================================================================================================================
<S> <C> <C> <C>
Small Cap Value Portfolio
2000 $[] [] []
-------------------------------------------------------------------------------------------------------------------------------
1999 $107,446 $14,326 $121,772
-------------------------------------------------------------------------------------------------------------------------------
1998 N/A N/A N/A
-------------------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
2000 $[] [] []
-------------------------------------------------------------------------------------------------------------------------------
1999 $132,944 $0 $132,944
-------------------------------------------------------------------------------------------------------------------------------
1998 $155,198 $0 $155,198
-------------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
2000 $ [] []
-------------------------------------------------------------------------------------------------------------------------------
1999 $466,029 $256,316 $209,713
-------------------------------------------------------------------------------------------------------------------------------
1998 $273,545 $336,812 $610,357
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for each Fund of the Company. The Company
offers its shares continuously. While UAMFDI will use its best efforts to
sell shares of the Funds, 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 Company or the
Funds. The
31
<PAGE>
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 Funds.
32
<PAGE>
ADMINISTRATIVE SERVICES
--------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of
its services under the Fund Administration Agreement. UAMFSI may, at its
own expense, 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 Company. UAMFSI will pay
such people for such employment. The Company will not incur any obligations
with respect to such people. Other expenses incurred in the operation of
the Company will be borne by the Company 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 Funds.
. Printing and production costs of shareholders' reports and corporate
meetings.
34
<PAGE>
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as
follows:
. $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 Fund at
the following rates:
Annual Rate
-----------------------------------------------------------------
Limited Maturity Bond Portfolio 0.043%
-----------------------------------------------------------------
Small Cap Value Portfolio 0.043%
-----------------------------------------------------------------
Money Market Portfolio 0.023%
-----------------------------------------------------------------
2. An annual fee to UAMFSI for sub-administration and other services,
which UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-
disbursing services, which UAMFSI pays to DST Systems, Inc. calculated
as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Funds paid the following in
administrators fees;
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Value Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $14,658 $53,712 $68,370
-------------------------------------------------------------------------------------------------------------------------------
1998 N/A N/A N/A
-------------------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $31,888 $63,875 $95,763
-------------------------------------------------------------------------------------------------------------------------------
1998 $103,048 $86,420 $189,468
-------------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $38,984 $98,098 $137,082
-------------------------------------------------------------------------------------------------------------------------------
1998 $175,739 $140,251 $315,990
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Value Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $14,658 $53,712 $68,370
-------------------------------------------------------------------------------------------------------------------------------
1998 N/A N/A N/A
-------------------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $31,888 $63,875 $95,763
-------------------------------------------------------------------------------------------------------------------------------
1998 $103,048 $86,420 $189,468
-------------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $38,984 $98,098 $137,082
-------------------------------------------------------------------------------------------------------------------------------
1998 $175,739 $140,251 $315,990
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a
code of ethics under Rule 17j-1 of the 1940 Act that permits investment
personnel to purchase and sell securities for their personal account.
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 Funds. The Investment Agreement also directs the adviser
to use its best efforts to obtain the best execution with respect to all
transactions for the Funds. 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 Funds 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. Research services provided by brokers through which the Fund
effects securities transactions may be used by the portfolio's investment
adviser in servicing all of its accounts and not all of these services may
be used by the adviser in connection with the portfolio. Such research
include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs
and expenses), advice concerning the value of securities, the advisability
of investing in, purchasing or selling securities, the availability of
securities or the purchasers or sellers of securities, furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy and performance of accounts, effecting
securities transactions and performing functions incidental thereto (such
as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____
of the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers
or dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions
with dealers, the investment adviser may also consider the amount of
portfolio shares a broker-dealer has sold and the referral of other clients
by the broker to the
36
<PAGE>
adviser, subject to the requirements of best execution described above. In
addition, the portfolio may place trades with qualified broker-dealers who
recommend the portfolio or who act as agents in the purchase of portfolio
shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for each Fund 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 Funds, in a fair and
reasonable manner. Although there is no specified formula for allocating
such transactions, the Company'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 Funds 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 Funds execute
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 two fiscal years, the portfolios paid the following in
brokerage commissions:
Brokerage Commissions
---------------------------------------------------------------------------
Small Cap Value Portfolio
2000
--------------------------------------------------------------------------
1999 $136,808
--------------------------------------------------------------------------
Limited Maturity Bond Portfolio
2000
--------------------------------------------------------------------------
1999 $ 0
--------------------------------------------------------------------------
Money Market Portfolio
2000
--------------------------------------------------------------------------
1999 $ 0
37
<PAGE>
Capital Stock And Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed
its name to "The Regis Fund, Inc." On October 31, 1995, the Company 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 Company is an diversified, open-end management company. This means
that with respect to 75% of its total assets, the Funds may not invest more
than 5% of its total assets in the securities of any one issuer (other than
U.S. Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the
Company 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 Company. 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 Company's governing board.
If the Company is liquidated, the shareholders of each Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or
in the case of a class, belonging to that Fund and allocable to that class.
The Company will distribute is net assets to its shareholders in proportion
to the number of shares of that Fund or class thereof held by them and
recorded on the books of the Company. The liquidation of any Fund or class
thereof may be authorized at any time by vote of a majority of the members
of the governing board.
The Company will not hold annual meetings except when required to by the
1940 Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder
servicing and the distribution of such shares pursuant to a
distribution plan or other 12b-1 plan;
. Institutional Service 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; and
. Advisor 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.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
38
<PAGE>
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Funds at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the Funds at
least three days before the record date for income dividend or capital gain
distribution.
Each Fund send account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
FEDERAL TAXES
The Funds intend 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 it generally will be relieved of federal
income and excise taxes. If the Fund were to fail to make sufficient
distributions in a year, it would be subject to corporate income taxes
and/or excise taxes. In addition, if the shortfall were large enough, the
Funds could be disqualified as a regulated investment company. If a Fund
was 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. Moreover, if a Fund was to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income
taxes and/or excise taxes in respect of the shortfall or, if the shortfall
is large enough, the Fund could be disqualified as a regulated investment
company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year
period ending October 31 of such calendar year and 100% of any such amounts
that were not distributed in the prior year. The Funds intend to make
sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar
year to avoid liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year if such dividends are actually paid during January
of the following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
39
<PAGE>
Purchase, Redemtion And Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Funds is equal to
the NAV of its Fund. The Fund calculates its NAV 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
Fund, plus cash and other assets plus income accrued but not yet
received.
Each Fund 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
Funds must receive proper payment for the order by the time it calculates
its NAV on the following business day. Service Agents are responsible to
their customers and the Company for timely transmission of all subscription
and redemption requests, investment information, documentation and
money.
40
<PAGE>
Shareholders can buy full and fractional (calculated to three decimal
places) shares of the Funds. The Company will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Company 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 Funds' shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares
of Funds the with securities, instead of cash. If the Company 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 Company
will issue shares of the Funds at the NAV of the Fund determined as of the
same time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-
kind purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Funds;
. 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 Funds and are delivered to
the Funds 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 Funds cannot exceed 5% of
the net assets of the Funds. 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 funds' investments.
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:
41
<PAGE>
. 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 Company 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 Company or UAMSSC may be
liable for any losses due to unauthorized or fraudulent telephone
instructions if the Company or the UAMSSC do not employ the procedures
described above. Neither the Company 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 Funds to make payment wholly or
partly in cash, the Funds may pay redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by the Funds 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 Funds have 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 Funds 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 Funds.
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 Company 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.
42
<PAGE>
Other Redemption Information
Normally, the Company will pay for all shares redeemed under proper
procedures within seven days after it received your request. However, the
Company will pay your redemption proceeds earlier as applicable law so
requires.
The Company 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 SEC as a result of which it is not reasonably practicable for the
Fund to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the SEC may permit.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible
for the authenticity of the exchange instructions received by telephone.
The Board 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 other
mutual funds in the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Funds to another person by making a
written request to the Funds. 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 Funds measure 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 Funds calculate their
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 Funds 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 Funds 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
43
<PAGE>
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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of 10 Years 7-Day 30-Day
One Year Five Years or Since Inception Yield Yield Inception Date
-------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Small Cap Value Portfolio
-------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 12/15/98
-------------------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Portfolio
-------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 12/18/89
-------------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
-------------------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 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.
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.
44
<PAGE>
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 Funds' October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Funds' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the Funds'
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 Funds.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
45
<PAGE>
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of
the series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their Funds.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
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.
46
<PAGE>
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.
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.
47
<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
--------------------------------------------------------------------------------
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;
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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
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.
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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
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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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)
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.
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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.
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).
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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)
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.
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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.
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 Super Composite 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.
57
<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.
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.
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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.
59
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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 __, 2001
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the Fund dated February __,
2001, as supplemented from time to time. You may obtain the Fund's prospectus by
contacting the UAM Funds at the address listed above.
<PAGE>
<TABLE>
Table Of Contents
<S> <C>
Description of Permitted Investments....................................... 1
Borrowing................................................................. 1
Debt Securities........................................................... 1
Derivatives............................................................... 7
Equity Securities......................................................... 15
Foreign Securities........................................................ 17
Investment Companies...................................................... 21
Repurchase Agreements..................................................... 21
Restricted Securities..................................................... 21
Securities Lending........................................................ 21
Short Sales............................................................... 22
When Issued Transactions.................................................. 23
Investment Policies of the FUND............................................ 23
Fundamental Policies...................................................... 23
Non-Fundamental Policies.................................................. 24
Management of the Company.................................................. 25
Board Members............................................................. 25
Officers.................................................................. 26
Principal Shareholders............................Error! Bookmark not defined.
Investment Advisory and Other Services..................................... 28
Investment Adviser........................................................ 28
Distributor............................................................... 30
Service And Distribution Plans............................................ 30
Administrative Services................................................... 32
Custodian................................................................. 34
Independent Accountants................................................... 34
CODE OF ETHICS............................................................ 34
Brokerage Allocation and Other Practices................................... 34
Selection of Brokers...................................................... 34
Simultaneous Transactions................................................. 35
Brokerage Commissions..................................................... 35
Capital Stock and Other Securities......................................... 36
Purchase, Redemption and Pricing of Shares................................. 38
Net Asset Value Per Share................................................. 38
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............................................ 48
Fitch IBCA Ratings........................................................ 50
Comparative Benchmarks..................................................... 51
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Fund's prospectus, the Fund may use a variety of
investment strategies in addition to its principal investment strategies. This
SAI describes each of these investments/strategies and their risks. The Fund
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. You can find more information
concerning the limits on the ability of the Fund to use these investments in
"Investment Policies of the Fund?"
BORROWING
--------------------------------------------------------------------------------
The Fund may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 331/3% of its total assets (including
the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss. To
mitigate the risks of leverage, the Fund will limit the amount it may borrow
to not more than 33 1/3% of its total assets, taken at market value. In
addition, the Fund will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
The Fund will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
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 "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.
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<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 the Fund.
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
considered the equivalent of treasury securities and are backed by the full
faith and credit of the U.S. government. 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 Fund shares. To buy GNMA securities, the Fund may have to pay a premium over
the maturity value of the underlying mortgages, which the Fund 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.
2
<PAGE>
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. For example, payments of
interest and principal are more frequent (usually monthly) and their interest
rates are sometimes adjustable. In addition, 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 Fund 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.
The Fund 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.
3
<PAGE>
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Fund 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 Fund 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
Fund 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 Fund 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 Fund may invest in commercial
4
<PAGE>
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 Fund'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 Fund may record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
5
<PAGE>
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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Fund
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 Fund. If left unattended,
drifts in the average maturity of the Fund can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Fund.
6
<PAGE>
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Fund's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Fund 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." If 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 Fund 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 Fund 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 Fund 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 Fund are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
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. Unless otherwise stated
in the Fund's prospectus, the Fund may use derivatives to gain exposure to
various markets in a cost efficient manner,
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to reduce transaction costs or to remain fully invested. The Fund may also
invest in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Fund 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 Fund
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 or custodian bank, 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 Fund may incur commission expenses when it opens or closes a futures
position.
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 Fund 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 Fund 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
Fund 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 Fund obtain the right
to purchase, rather than sell, the underlying instrument at the option's
strike price. The Fund would normally purchase call options in anticipation of
an increase in the market value of securities it owns or wants to buy. The
Fund 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 Fund 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 Fund 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 Fund
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 Fund 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 Fund 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 Fund 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 Fund would hope to profit by
closing out the put option at a lower price. If security prices fall, the Fund
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 Fund 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 Fund 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 Fund would expect the option to expire and the
premium it received to offset the decline of the security's value. However,
the Fund 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 Fund is permitted only to write covered options. At the time of selling
the call option, the Fund may cover the option by owning:
. 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;
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. 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.
At the time of selling a put option, the Fund may cover the put option by:
. 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 Fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Fund 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 Fund 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 Fund 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 Fund 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 Fund
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 Fund.
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Combined Positions
The Fund 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 Fund 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 Fund 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 Fund
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 Fund 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 Fund 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 Fund could also hedge the position by
selling another currency expected to perform similarly to the currency in
which the Fund'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 Fund 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 Fund 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
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currency that is purchased. Cross-hedges protect against losses resulting from
a decline in the hedged currency, but will cause the Fund 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 Fund 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 Fund
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 Fund 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 Fund. If a swap agreement calls for payments by the Fund, the Fund
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 Fund 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 Fund 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 Fund's gains
or losses. In order to reduce the risk associated with leveraging, the Fund
may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Fund 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 Fund's accrued obligations under the swap agreement
over the accrued amount the Fund are 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 Fund'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 Fund 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, the Fund could lose money by
investing in an interest rate swap if interest rates change adversely. For
example, if the Fund enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Fund may have to pay more
money than it receives. Similarly, if the Fund enter into a swap where it
agrees to exchange a fixed rate of interest for a floating rate of interest,
the Fund 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. The Fund 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 Fund than if it had not entered into any
derivatives transactions. Derivatives may magnify the Fund'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
Fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Fund to greater risks.
Correlation of Prices
The Fund'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 Fund are 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 Fund's prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Fund 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 Fund. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Fund'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 Fund's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Fund can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Fund may close out a futures contract only on the exchange the
contract was initially traded. Although the Fund intend 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 Fund may not be able
to close out its position. In an illiquid market, the Fund 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
Fund may lose money by investing in derivatives. For example, if the Fund 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
Fund could be required to sell the security upon exercise at a price below the
current market price. Similarly, if the Fund 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 Fund 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:
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. 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, the Fund 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 Fund and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Fund 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuer's
common stock at the Fund's option during a specified time period (such as
convertible preferred stocks, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer's capital structure, but is usually subordinated to
similar non-convertible securities. 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. In general, the market value of
a convertible security is at least the higher of its "investment value' (i.e.,
its value as a fixed income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock).
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. The price of
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a convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the
underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. Government securities and (ii) call options or warrants
on the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has
similar investment characteristics, but may differ with respect to credit
quality, time to maturity, trading characteristics, and other factors. Because
the Fund will create synthetic convertible positions only out of high grade
fixed income securities, the credit rating associated with the Fund's
synthetic convertible investments is generally expected to be higher than that
of the average convertible security, many of which are rated below high grade.
However, because the options used to create synthetic convertible positions
will generally have expirations between one month and three years of the time
of purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset (in
the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences in
maturities, and the Adviser and applicable sub-adviser take such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Fund may extend the maturity by investing in a new option with longer maturity
on the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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
16
<PAGE>
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
17
<PAGE>
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 Fund
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
18
<PAGE>
. 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 Fund ability to invest in a particular country or make it
very expensive for the Fund 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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as,
those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Fund 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
19
<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 Fund to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the Fund receive from its investments. The Fund do 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 Fund also anticipates pricing, trading, settling
and valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the Fund expect 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?
20
<PAGE>
INVESTMENT COMPANIES
--------------------------------------------------------------------------------
The Fund 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 Fund. Like other shareholders, the Fund would pay
its proportionate share of those fees. Consequently, shareholders of the Fund
would pay not only the management fees of the Fund, but also the management
fees of the investment company in which the Fund invests. The Fund 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 Fund in the UAM Complex 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 Fund's investment policies and restrictions; and
. The Fund's adviser waives any fees it earns on the assets of the Fund that
is invested in the UAM DSI Money Market Portfolio.
The Fund 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 Fund normally use repurchase agreements to earn income
on assets that are not invested.
When the Fund enter 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 Fund's right to sell the
security may be restricted. In addition, the value of the security might
decline before the Fund can sell it and the Fund might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Fund may purchase restricted securities that are not registered for sale
to the general public. The Fund may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Fund's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Fund
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Fund 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. If the Fund lend its securities,
it will follow the following guidelines:
21
<PAGE>
. 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 Fund
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 Fund lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Fund 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Fund can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Fund replace the
borrowed security. Likewise, the Fund can profit if the price of the security
declines between those dates.
To borrow the security, the Fund also may be required to pay a premium, which
would increase the cost of the security sold. The Fund will incur transaction
costs in effecting short sales. The Fund's gains and losses will be decreased
or increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Fund may be required to pay in connection with a
short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, the Fund may engage in short sales "against the box." In a
short sale against the box, the Fund agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no extra
cost. The Fund will incur transaction costs to open, maintain and close short
sales against the box.
Restrictions on Short Sales
The Fund will not short sell a security if:
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<PAGE>
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Fund net assets.
. The market value of the securities of any single issuer that have been sold
short by the Fund would exceed the two percent (2%) of the value of the
Fund's net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Fund sell a security short, its custodian segregates an amount of
cash or liquid securities equal to the difference between (a) the market value
of the securities sold short at the time they were sold short and (b) any cash
or U.S. Government securities the Fund are required to deposit with the broker
in connection with the short sale (not including the proceeds from the short
sale). The segregated assets are marked to market daily in an attempt to
ensure that the amount deposited in the segregated account plus the amount
deposited with the broker is at least equal to the market value of the
securities at the time they were sold short.
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 Fund contract 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 Fund have
committed to purchase before the securities are delivered, although the Fund
may earn income on securities it has in a segregated account. The Fund 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 Fund would use 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 Fund engage 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 Fund 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 Fund assume 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 Fund do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the FUND
The Fund 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 Fund 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 that the
Fund cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Fund will not:
. Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This restriction
does not, however, apply to any portfolio classified as a non-diversified
series of an open-end investment company under the 1940 Act.
23
<PAGE>
. Borrow money, except to the extent permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in a Fund's prospectus and
statement of additional information as they may be amended from time to time.
. Issue senior securities, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest in,
securities of issuers that deal or invest in real estate and (3) that a Fund
may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Fund may
change them without shareholder approval. The Fund may:
. purchase and sell currencies or securities on a when-issued, delayed delivery
or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency and
foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of its
investable assets in securities of a single open-end management investment
company with substantially the same investment objectives, policies and
limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Fund intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities, including
(1) treating as illiquid securities that may not be disposed of in the
ordinary course of business within 7 days at approximately the value at which
the portfolio has valued the investment on its books; and (2) limiting its
holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
24
<PAGE>
. lend portfolio securities to registered broker-dealers or other institutional
investors. These loans may not exceed 33 1/3% of the portfolio's total assets
taken at market value. In addition, a Fund must receive at least 100%
collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events per
year.
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting
fee and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Fund in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr. English
has an investment advisory relationship with Investment Counselors of
Maryland, an investment adviser to one of the Funds in the UAM Funds Complex.
However, the Company does not believe that the relationship is a material
business relationship, and, therefore, does not consider him to be an
interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management Company,
RR2 Box 700 Inc. and Great Island Investment Company, Inc. (investment
Center Harbor, NH 03226 management). From 1988 to 1993, Mr. Bennett was President of
1/26/29 Bennett Management Company. Mr. Bennett serves on the Board of
each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn was
Washington, DC 20037 Vice President for Finance and Administration and Treasurer of
8/14/51 Radcliffe College (Education). Ms. Dunn serves on the Board of
each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June 1998
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law firm
Dechert Price & Rhoads from July 1976 to June 1998. He was also
formerly a Director of Hofler Corp. (manufacturer of gear
grinding machines). Mr. Humenuk serves on the Board of each
Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the investment
Baltimore, MD 21201 management business. He is also Chairman of the Board of Chektec
8/5/48 Corporation (Drugs) and Cyber Scientific, Inc. (computer mouse
company). Mr. English serves on the Board of each Company in the
UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since May
One International Place 2000; Chairman and Chief Executive Officer of UNUM Corporation 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee of Bates College and the
3/5/43 Committee for Economic Development; Chairman-elect of the Board
of Trustees of the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of Public Health; Director
of the Nashua Corporation and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides information
regarding their present positions, date of birth, address and their principal
occupations during the past five years. The Company's officers are paid by
UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
James F. Orr III* Board Member President, Chief Executive Officer and Director of 0 0
One International Place President UAM since May 2000; Chairman and Chief Executive
Boston, MA 02110 Officer of UNUM Corporation (Insurance) from 1988 to
3/5/43 1999; Trustee of Bates College and the Committee for
Economic Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for Society,
and the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua Corporation
and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer) since
April 2000; Senior Vice President and Secretary of
Signature Financial Group, Inc. (financial services)
and affiliated broker-dealers from 1991 to 2000;
Director and Secretary of Signature Financial Group
Europe, Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000; Secretary of the 59
Wall Street Family of Mutual Funds (mutual funds)
from 1996 to 2000.
------------------------------------------------------------------------------------------------------------------------------------
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.
------------------------------------------------------------------------------------------------------------------------------------
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer of
Boston, MA 02110 UAMFDI (broker-dealer) since February 2000; Assistant
12/23/63 Vice President of Scudder Kemper Investments
(financial services) from May 1992 to February 1998.
------------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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. 15.90% Institutional Class Shares
Reinvest Account
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
---------------------------------------------------------------------------------------------------------------------------
Fidelity Invest Inst Operations Co Inc. 31.56% Institutional Class Shares
For Certain Employee Benefit Plans
100 Magellan Way KWIC
Covington, KY 41015-1999
---------------------------------------------------------------------------------------------------------------------------
Dingle & Co. 5.75% Institutional Class Shares
C/O Comerica Bank
Attn: Mutual Funds
P.O. Box 75000
Detroit, MI 48275-0001
</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 December 15,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolio.
27
<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. United Asset Management Corporation is a wholly-owned subsidiary of Old
Mutual plc, a United Kingdom based financial services group.
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.
-------------------------------------------------------------------------------------------------------------------------
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.
</TABLE>
28
<PAGE>
Name & Title Experience
------------------------------------------------------------------------------
David Faircloth, CFA Mr. Faircloth joined the adviser in 1998 with over 10
Vice President & years of investment experience. Prior to joining the
Portfolio Manager adviser, Mr. Faircloth was a Portfolio Manager and Vice
President at 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.
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Company 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 the Fund's assets;
. Continuously reviews, supervises and administers the investment program of
the Fund; and
. Determines what portion of the Fund'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 Company, 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 Fund.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Fund'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
Company.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
29
<PAGE>
Advisory Fees
For its services, the Fund pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of the Fund. Due
to the effect of fee waivers by the adviser, the actual percentage of average
net assets that the Fund pay 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 Fund paid the following in management fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees
Investment Advisory Fees Paid Waived Total Investment Advisory Fees
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FMA Small Company Portfolio
2000
----------------------------------------------------------------------------------------------------------------------------------
1999 $1,029,996 $310,560 $1,340,556
1998 $ 854,789 $110,445 $ 965,234
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for the Fund of the Company. The Company
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.
SERVICE AND DISTRIBUTION PLANS
--------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan (the
"Plans") for the Fund'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 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.
30
<PAGE>
. 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 Fund 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.
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
2000
</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.
31
<PAGE>
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 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 the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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
32
<PAGE>
Company. UAMFSI will pay such people for such employment. The Company will not
incur any obligations with respect to such people. Other expenses incurred in
the operation of the Company will be borne by the Company 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 Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as follows:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of the Fund at the
following rates:
<TABLE>
<CAPTION>
Annual Rate
--------------------------------------------------------------------------------------------------------------------------
<S> <C>
FMA Small Company Portfolio 0.063%
</TABLE>
2. An annual fee to UAMFSI for sub-administration and other services, which
UAMFSI pays to SEI, calculated as follows:
. Not more than $35,000 for the first operational class; plus
33
<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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Fund paid the following in administration
and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FMA Small Company Portfolio
2000
------------------------------------------------------------------------------------------------------------
1999 $87,089 $128,860 $215,949
1998 $62,840 $144,755 $207,595
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a code
of ethics under Rule 17j-1 of the 1940 Act that permits investment personnel
to purchase and sell securities for their personal account.
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 Fund. The Investment Agreement also directs the adviser to use its
best efforts to obtain the best execution with respect to all transactions for
the Fund. 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 Fund 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. Research services provided by brokers
through which the Fund effects securities transactions may be used by the
portfolio's investment adviser in servicing all of its accounts and not all of
these services may be used by the adviser in connection with the portfolio.
Such research include research reports on particular industries and companies,
economic surveys and analyses, recommendations as to specific securities and
other products or services (e.g., quotation equipment and computer related
costs and expenses), advice concerning the value of securities, the
34
<PAGE>
advisability of investing in, purchasing or selling securities, the
availability of securities or the purchasers or sellers of securities,
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts,
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____ of
the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers or
dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions with
dealers, the investment adviser may also consider the amount of portfolio
shares a broker-dealer has sold and the referral of other clients by the
broker to the adviser, subject to the requirements of best execution described
above. In addition, the portfolio may place trades with qualified broker-
dealers who recommend the portfolio or who act as agents in the purchase of
portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for the Fund 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 Fund, in a fair and reasonable manner. Although there
is no specified formula for allocating such transactions, the Company'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 Fund 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 Fund execute 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 two fiscal years, the portfolios paid the following in brokerage
commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
------------------------------------------------------------------------------------------------------------------------------
<S> <C>
FMA Small Company Portfolio
2000
--------------------------------------------------------------------------------------------------------------------------------
1999 $1,161,191
</TABLE>
35
<PAGE>
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Company 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
Company is an diversified, open-end management company. This means that with
respect to 75% of its total assets, the Fund may not invest more than 5% of
its total assets in the securities of any one issuer (other than U.S.
Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the Company
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
Company. 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
Company's governing board.
If the Company is liquidated, the shareholders of the Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or in
the case of a class, belonging to that Fund and allocable to that class. The
Company will distribute is net assets to its shareholders in proportion to the
number of shares of that Fund or class thereof held by them and recorded on
the books of the Company. The liquidation of any Fund or class thereof may be
authorized at any time by vote of a majority of the members of the governing
board.
The Company will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing and
the distribution of such shares pursuant to a distribution plan or other
12b-1 plan;
. Institutional Service 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;
and
. Advisor 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. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
36
<PAGE>
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Fund 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.
Each Fund send account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The Fund intend 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 it generally will be relieved of federal income
and excise taxes. If the Fund were to fail to make sufficient distributions in
a year, it would be subject to corporate income taxes and/or excise taxes. In
addition, if the shortfall were large enough, the Fund could be disqualified
as a regulated investment company. If a Fund was 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. Moreover, if a Fund was to
fail to make sufficient distributions in a year, the Fund would be subject to
corporate income taxes and/or excise taxes in respect of the shortfall or, if
the shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year period
ending October 31 of such calendar year and 100% of any such amounts that were
not distributed in the prior year. The Fund intend to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Fund on December
31 of such year if such dividends are actually paid during January of the
following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
37
<PAGE>
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Fund is equal to the
NAV of its Fund. The Fund calculates its NAV 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 Fund,
plus cash and other assets plus income accrued but not yet received.
Each Fund 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 it calculates its
NAV on the following business day. Service Agents are responsible to their
customers and the Company 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 the Fund. The Company will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Company 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
Fund shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares of
Fund the with securities, instead of cash. If the Company 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 Company will
issue shares of the Fund at the NAV of the Fund determined as of the same
time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Fund;
. 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 Fund 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 Fund cannot exceed 5% of the
net assets of the Fund. 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 Fund investments.
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:
39
<PAGE>
. 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 Company 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 Company or UAMSSC may be liable for any losses due
to unauthorized or fraudulent telephone instructions if the Company or the
UAMSSC do not employ the procedures described above. Neither the Company 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 Fund 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 have 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 Company 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.
40
<PAGE>
Other Redemption Information
Normally, the Company will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Company will
pay your redemption proceeds earlier as applicable law so requires.
The Company 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
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or to fairly determine the value of its
assets; or
. for such other periods as the SEC may permit.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
Board 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 other mutual funds in
the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Fund 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 Fund measure 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 Fund calculate their 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 Fund 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 additiona
41
<PAGE>
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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of 10
Years or Since
One Year Five Years Inception Inception Date
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Class 12/31/92
------------------------------------------------------------------------------------------------------
Institutional Service Class 08/01/97
</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.
42
<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 Fund's October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Fund's Annual Report is incorporated by
reference herein. Shareholders may get copies of the Fund's Annual Report
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 Fund.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of the
series of the Company.
43
<PAGE>
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their Funds.
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, Inc., the Fund's distributor.
Bond Ratings
MOODY'S STOCK SERVICCES, 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.
44
<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.
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.
45
<PAGE>
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.
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.
46
<PAGE>
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.
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.
47
<PAGE>
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.
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 but may vary slightly from time
AA- 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 prudent investment. Considerable
BBB- variability in risk during economic cycles.
48
<PAGE>
BB+/BB/ Below investment grade but deemed likely to meet 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/- 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.
49
<PAGE>
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.
50
<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 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 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.
52
<PAGE>
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 __, 2001
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the Fund dated
February __, 2001, as supplemented from time to time. You may obtain the
Fund's prospectus by contacting the UAM Funds at the address listed above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments......................... 1
Borrowing.................................................. 1
Debt Securities............................................ 1
Derivatives................................................ 7
Equity Securities.......................................... 15
Foreign Securities......................................... 17
Investment Companies....................................... 20
Repurchase Agreements...................................... 21
Restricted Securities...................................... 21
Securities Lending......................................... 21
Short Sales................................................ 22
When Issued Transactions................................... 23
Investment Policies of the FUND.............................. 23
Fundamental Policies....................................... 23
Non-Fundamental Policies................................... 24
Management of the Company.................................... 25
Board Members.............................................. 25
Officers................................................... 26
Principal Shareholders....................................... 27
Investment Advisory and Other Services....................... 27
Investment Adviser......................................... 27
Distributor................................................ 30
Shareholder Servicing Arrangements......................... 30
Administrative Services.................................... 30
Custodian.................................................. 32
Independent Accountants.................................... 32
CODE OF ETHICS............................................. 32
Brokerage Allocation and Other Practices..................... 32
Selection of Brokers....................................... 32
Simultaneous Transactions.................................. 33
Brokerage Commissions...................................... 33
Capital Stock and Other Securities........................... 34
Purchase, Redemption and Pricing of Shares................... 36
Net Asset Value Per Share.................................. 36
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............................. 46
Fitch IBCA Ratings......................................... 47
Comparative Benchmarks....................................... 49
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Fund's prospectus, the Fund may use a variety of
investment strategies in addition to its principal investment strategies. This
SAI describes each of these investments/strategies and their risks. The Fund
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. You can find more information
concerning the limits on the ability of the Fund to use these investments in
"Investment Policies of the Fund."
BORROWING
--------------------------------------------------------------------------------
The Fund may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 331/3% of its total assets (including
the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss. To
mitigate the risks of leverage, the Fund will limit the amount it may borrow
to not more than 33 1/3% of its total assets, taken at market value. In
addition, the Fund will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
The Fund will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
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 "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.
1
<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 the Fund.
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
considered the equivalent of treasury securities and are backed by the full
faith and credit of the U.S. government. 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 Fund shares. To buy GNMA securities, the Fund may have to pay a
premium over the maturity value of the underlying mortgages, which the Fund
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.
2
<PAGE>
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. For example, payments of
interest and principal are more frequent (usually monthly) and their interest
rates are sometimes adjustable. In addition, 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 Fund 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.
The Fund 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.
3
<PAGE>
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Fund 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 Fund 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
Fund 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 Fund 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 Fund may invest in commercial
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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 Fund'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 Fund may 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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Fund
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 Fund. If left unattended,
drifts in the average maturity of the Fund can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Fund.
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Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Fund's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Fund 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." If 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 Fund 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 Fund 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 Fund 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 Fund are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise stated
in the Fund's prospectus, the Fund may use derivatives to gain exposure to
various markets in a cost efficient manner,
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to reduce transaction costs or to remain fully invested. The Fund may also
invest in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Fund 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 Fund
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 or custodian bank, 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 Fund may incur commission expenses when it opens or closes a futures
position.
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 Fund 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 Fund 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
Fund 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 Fund obtain the right
to purchase, rather than sell, the underlying instrument at the option's
strike price. The Fund would normally purchase call options in anticipation of
an increase in the market value of securities it owns or wants to buy. The
Fund 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 Fund 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 Fund 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 Fund
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 Fund 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 Fund 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 Fund 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 Fund would hope to profit by
closing out the put option at a lower price. If security prices fall, the Fund
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 Fund 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 Fund 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 Fund would expect the option to expire and the
premium it received to offset the decline of the security's value. However,
the Fund 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 Fund is permitted only to write covered options. At the time of selling
the call option, the Fund may cover the option by owning:
. 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;
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. 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.
At the time of selling a put option, the Fund may cover the put option by:
. 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 Fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Fund 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 Fund 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 Fund 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 Fund 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 Fund
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 Fund.
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Combined Positions
The Fund 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 Fund 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 Fund 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 Fund
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 Fund 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 Fund 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 Fund could also hedge the position by
selling another currency expected to perform similarly to the currency in
which the Fund'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 Fund 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 Fund 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
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currency that is purchased. Cross-hedges protect against losses resulting from
a decline in the hedged currency, but will cause the Fund 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 Fund 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 Fund
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 Fund 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 Fund. If a swap agreement calls for payments by the Fund, the Fund
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 Fund 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 Fund 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 Fund's gains
or losses. In order to reduce the risk associated with leveraging, the Fund
may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Fund 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 Fund's accrued obligations under the swap agreement
over the accrued amount the Fund are 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 Fund'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 Fund 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, the Fund could lose money by
investing in an interest rate swap if interest rates change adversely. For
example, if the Fund enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Fund may have to pay more
money than it receives. Similarly, if the Fund enter into a swap where it
agrees to exchange a fixed rate of interest for a floating rate of interest,
the Fund 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. The Fund 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 Fund than if it had not entered into any
derivatives transactions. Derivatives may magnify the Fund'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
Fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Fund to greater risks.
Correlation of Prices
The Fund'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 Fund are 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 Fund's prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Fund 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 Fund. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Fund'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 Fund's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Fund can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Fund may close out a futures contract only on the exchange the
contract was initially traded. Although the Fund intend 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 Fund may not be able
to close out its position. In an illiquid market, the Fund 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
Fund may lose money by investing in derivatives. For example, if the Fund 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
Fund could be required to sell the security upon exercise at a price below the
current market price. Similarly, if the Fund 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 Fund 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:
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. 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, the Fund 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 Fund and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Fund 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuer's
common stock at the Fund's option during a specified time period (such as
convertible preferred stocks, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer's capital structure, but is usually subordinated to
similar non-convertible securities. 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. In general, the market value of
a convertible security is at least the higher of its "investment value' (i.e.,
its value as a fixed income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock).
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. The price of
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a convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the
underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. Government securities and (ii) call options or warrants
on the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has
similar investment characteristics, but may differ with respect to credit
quality, time to maturity, trading characteristics, and other factors. Because
the Fund will create synthetic convertible positions only out of high grade
fixed income securities, the credit rating associated with the Fund's
synthetic convertible investments is generally expected to be higher than that
of the average convertible security, many of which are rated below high grade.
However, because the options used to create synthetic convertible positions
will generally have expirations between one month and three years of the time
of purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset (in
the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences in
maturities, and the Adviser and applicable sub-adviser take such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Fund may extend the maturity by investing in a new option with longer maturity
on the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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
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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
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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 Fund
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
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. 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 Fund ability to invest in a particular country or make it
very expensive for the Fund 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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as,
those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Fund 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 Fund to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the Fund receive from its investments. The Fund do 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 Fund also anticipates pricing, trading, settling
and valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the Fund expect 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?
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INVESTMENT COMPANIES
--------------------------------------------------------------------------------
The Fund 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 Fund. Like other shareholders, the Fund would pay
its proportionate share of those fees. Consequently, shareholders of the Fund
would pay not only the management fees of the Fund, but also the management
fees of the investment company in which the Fund invests. The Fund 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 Funds in the UAM Complex 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 Fund's investment policies and restrictions; and
. The Fund's adviser waives any fees it earns on the assets of the Fund that
is invested in the UAM DSI Money Market Portfolio.
The Fund 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 Fund normally use repurchase agreements to earn income
on assets that are not invested.
When the Fund enter 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 Fund's right to sell the
security may be restricted. In addition, the value of the security might
decline before the Fund can sell it and the Fund might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Fund may purchase restricted securities that are not registered for sale
to the general public. The Fund may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Fund's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Fund
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Fund 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. If the Fund lends its
securities, it will follow the following guidelines:
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<PAGE>
. 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 Fund
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 Fund lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Fund 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Fund can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Fund replace the
borrowed security. Likewise, the Fund can profit if the price of the security
declines between those dates.
To borrow the security, the Fund also may be required to pay a premium, which
would increase the cost of the security sold. The Fund will incur transaction
costs in effecting short sales. The Fund's gains and losses will be decreased
or increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Fund may be required to pay in connection with a
short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, the Fund may engage in short sales "against the box." In a short
sale against the box, the Fund agrees to sell at a future date a security that
it either currently owns or has the right to acquire at no extra cost. The
Fund will incur transaction costs to open, maintain and close short sales
against the box.
Restrictions on Short Sales
The Fund will not short sell a security if:
22
<PAGE>
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Fund net assets.
. The market value of the securities of any single issuer that have been sold
short by the Fund would exceed the two percent (2%) of the value of the
Fund's net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Fund sell a security short, its custodian segregates an amount of
cash or liquid securities equal to the difference between (a) the market value
of the securities sold short at the time they were sold short and (b) any cash
or U.S. Government securities the Fund are required to deposit with the broker
in connection with the short sale (not including the proceeds from the short
sale). The segregated assets are marked to market daily in an attempt to
ensure that the amount deposited in the segregated account plus the amount
deposited with the broker is at least equal to the market value of the
securities at the time they were sold short.
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
Fund contract 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 Fund have
committed to purchase before the securities are delivered, although the Fund
may earn income on securities it has in a segregated account. The Fund 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 Fund would use 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 Fund engage 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 Fund 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 Fund assume 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 Fund do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the FUND
The Fund 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 Fund 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 that the
Fund cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Fund will not:
. Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This restriction
does not, however, apply to any portfolio classified as a non-diversified
series of an open-end investment company under the 1940 Act.
23
<PAGE>
. Borrow money, except to the extent permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in a Fund's prospectus and
statement of additional information as they may be amended from time to time.
. Issue senior securities, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest in,
securities of issuers that deal or invest in real estate and (3) that a Fund
may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Fund may
change them without shareholder approval. The Fund may:
. purchase and sell currencies or securities on a when-issued, delayed delivery
or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency and
foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of its
investable assets in securities of a single open-end management investment
company with substantially the same investment objectives, policies and
limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Fund intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities, including
(1) treating as illiquid securities that may not be disposed of in the
ordinary course of business within 7 days at approximately the value at which
the portfolio has valued the investment on its books; and (2) limiting its
holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
24
<PAGE>
. lend portfolio securities to registered broker-dealers or other institutional
investors. These loans may not exceed 33 1/3% of the portfolio's total assets
taken at market value. In addition, a Fund must receive at least 100%
collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events per
year.
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting
fee and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Fund in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr. English
has an investment advisory relationship with Investment Counselors of
Maryland, an investment adviser to one of the Funds in the UAM Funds Complex.
However, the Company does not believe that the relationship is a material
business relationship, and, therefore, does not consider him to be an
interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From Uam Funds
Name, Address, Company as of Complex as of
Date of Birth Principal Occupations During the Past 5 Years 10/31/00 10/31/00
====================================================================================================================================
<C> <S> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management Company,
RR2 Box 700 Inc. and Great Island Investment Company, Inc. (investment
Center Harbor, NH 03226 management). From 1988 to 1993, Mr. Bennett was President of
1/26/29 Bennett Management Company. Mr. Bennett serves on the Board of
each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn was
Washington, DC 20037 Vice President for Finance and Administration and Treasurer of
8/14/51 Radcliffe College (Education). Ms. Dunn serves on the Board of
each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From Uam Funds
Name, Address, Company as of Complex as of
Date of Birth Principal Occupations During the Past 5 Years 10/31/00 10/31/00
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June 1998
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law firm
Dechert Price & Rhoads from July 1976 to June 1998. He was also
formerly a Director of Hofler Corp. (manufacturer of gear
grinding machines). Mr. Humenuk serves on the Board of each
Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the investment
Baltimore, MD 21201 management business. He is also Chairman of the Board of Chektec
8/5/48 Corporation (Drugs) and Cyber Scientific, Inc. (computer mouse
company). Mr. English serves on the Board of each Company in the
UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since May
One International Place 2000; Chairman and Chief Executive Officer of UNUM Corporation 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee of Bates College and the
3/5/43 Committee for Economic Development; Chairman-elect of the Board
of Trustees of the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of Public Health; Director
of the Nashua Corporation and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides information
regarding their present positions, date of birth, address and their principal
occupations during the past five years. The Company's officers are paid by
UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Compensation From Compensation From
Name, Address Position the Funds as of the Fund Complex as
Date of Birth with Fund Principal Occupations During the Past 5 Years October 31, 1999 of October 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
James F. Orr III* Board Member President, Chief Executive Officer and Director of 0 0
One International Place President UAM since May 2000; Chairman and Chief Executive
Boston, MA 02110 Officer of UNUM Corporation (Insurance) from 1988 to
3/5/43 1999; Trustee of Bates College and the Committee for
Economic Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for Society,
and the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua Corporation
and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate
Compensation From Compensation From
Name, Address Position the Funds as of the Fund Complex as
Date of Birth with Fund Principal Occupations During the Past 5 Years October 31, 1999 of October 31, 1999
----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer) since
April 2000; Senior Vice President and Secretary of
Signature Financial Group, Inc. (financial services)
and affiliated broker-dealers from 1991 to 2000;
Director and Secretary of Signature Financial Group
Europe, Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000; Secretary of the 59
Wall Street Family of Mutual Funds (mutual funds)
from 1996 to 2000.
----------------------------------------------------------------------------------------------------------------------------------
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.
----------------------------------------------------------------------------------------------------------------------------------
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer of
Boston, MA 02110 UAMFDI (broker-dealer) since February 2000; Assistant
12/23/63 Vice President of Scudder Kemper Investments
(financial services) from May 1992 to February 1998.
----------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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 11.01% Institutional
14501 Sweitzer Lane
Laurel, MD 20707-5902
--------------------------------------------------------------------------------------------------------------------
Major League Baseball Players Benefit Plan 9.73% Institutional
c/o Investment Counselors of MD
Attn: Anne D. Benson
803 Cathedral Street
Baltimore, MD 21201-5201
--------------------------------------------------------------------------------------------------------------------
Strafe & CO 5.81% Institutional
FAO Riverside Methodist Hospital Foundation
PO Box 160
Westerville, OH 43086-0160
--------------------------------------------------------------------------------------------------------------------
Marshall Ilsey Trust 5.34% Institutional
FBO Alliant Energy Master Ret
100 N. Water Street
Milwaukee, WI 53202-6025
</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 December 15,
2000, the directors and officers of the Fund owned less than 1% of the
outstanding shares of the portfolio.
27
<PAGE>
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. United Asset Management Corporation is
a wholly-owned subsidiary of Old Mutual plc, a United Kingdom based financial
services group.
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.
-------------------------------------------------------------------------------------------------------------------------
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.
28
<PAGE>
<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 jopined 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>
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Company 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 the Fund's assets;
. Continuously reviews, supervises and administers the investment program of
the Fund; and
. Determines what portion of the Fund's assets will be invested in securities
and what portion will consist of cash.
29
<PAGE>
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 Company, 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 Fund.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Fund'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
Company.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the Fund pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of the Fund. Due
to the effect of fee waivers by the adviser, the actual percentage of average
net assets that the Fund pay 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 Fund paid the following in management fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Paid
==================================================================================================================================
<S> <C>
ICM Small Company Portfolio
2000
----------------------------------------------------------------------------------------------------------------------------------
1999 $4,391,761
1998 $4,163,155
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for the Fund of the Company. The Company
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 Company or the Fund. The
person making such payments may do so out of its revenues, its profits or any
other source available to it. Such services
30
<PAGE>
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 Fund.
ADMINISTRATIVE SERVICES
--------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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 Company. UAMFSI will pay such people for
such employment. The Company will not incur any obligations with respect to
such people. Other expenses incurred in the operation of the Company will be
borne by the Company 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 Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
31
<PAGE>
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as follows:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of the Fund at the
following rates:
Annual Rate
================================================================
ICM Small Company Portfolio 0.063%
2. An annual fee to UAMFSI for sub-administration and other services, which
UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Fund paid the following in administration
and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
=================================================================================================
<S> <C> <C> <C>
ICM Small Company Portfolio
2000
-------------------------------------------------------------------------------------------------
1999 $251,348 $314,423 $ 565,771
1998 $801,694 $544,957 $1,346,651
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a code
of ethics under Rule 17j-1 of the 1940 Act that permits investment personnel
to purchase and sell securities for their personal account.
32
<PAGE>
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 Fund. The Investment Agreement also directs the adviser to use its
best efforts to obtain the best execution with respect to all transactions for
the Fund. 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 Fund 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. Research services provided by brokers
through which the Fund effects securities transactions may be used by the
portfolio's investment adviser in servicing all of its accounts and not all of
these services may be used by the adviser in connection with the portfolio.
Such research include research reports on particular industries and companies,
economic surveys and analyses, recommendations as to specific securities and
other products or services (e.g., quotation equipment and computer related
costs and expenses), advice concerning the value of securities, the
advisability of investing in, purchasing or selling securities, the
availability of securities or the purchasers or sellers of securities,
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts,
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____ of
the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers or
dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions with
dealers, the investment adviser may also consider the amount of portfolio
shares a broker-dealer has sold and the referral of other clients by the
broker to the adviser, subject to the requirements of best execution described
above. In addition, the portfolio may place trades with qualified broker-
dealers who recommend the portfolio or who act as agents in the purchase of
portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for the Fund 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 Fund, in a fair and reasonable manner. Although there
is no specified formula for allocating such transactions, the Company'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.
33
<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 Fund 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 Fund execute 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 two fiscal years, the portfolios paid the following in brokerage
commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
====================================================================================================================================
<S> <C>
ICM Small Company Portfolio
2000
------------------------------------------------------------------------------------------------------------------------------------
1999 $1,046,123
</TABLE>
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Company 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
Company is an diversified, open-end management company. This means that with
respect to 75% of its total assets, the Fund may not invest more than 5% of
its total assets in the securities of any one issuer (other than U.S.
Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the Company
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
Company. 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
Company's governing board.
If the Company is liquidated, the shareholders of the Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or in
the case of a class, belonging to that Fund and allocable to that class. The
Company will distribute is net assets to its shareholders in proportion to the
number of shares of that Fund or class thereof held by them and recorded on
the books of the Company. The liquidation of any Fund or class thereof may be
authorized at any time by vote of a majority of the members of the governing
board.
34
<PAGE>
The Company will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing and
the distribution of such shares pursuant to a distribution plan or other
12b-1 plan;
. Institutional Service 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;
and
. Advisor 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. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Fund 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.
Each Fund send account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The Fund intend 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 it generally will be relieved of federal income
and excise taxes. If the Fund were to fail to make sufficient distributions in
a year, it would be subject to corporate income taxes and/or excise taxes. In
addition, if the shortfall were large enough, the Fund could be disqualified
as a regulated investment company. If a Fund was 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. Moreover, if a Fund was to
fail to make sufficient distributions in a year, the Fund would be subject to
corporate income taxes and/or excise taxes in respect of the shortfall or, if
the shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income
35
<PAGE>
(excess of capital gains over capital losses) for the one year period ending
October 31 of such calendar year and 100% of any such amounts that were not
distributed in the prior year. The Fund intend to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Fund on December
31 of such year if such dividends are actually paid during January of the
following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Fund is equal to the
NAV of its Fund. The Fund calculates its NAV 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 Fund,
plus cash and other assets plus income accrued but not yet received.
Each Fund 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.
36
<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 it calculates its
NAV on the following business day. Service Agents are responsible to their
customers and the Company 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 the Fund. The Company will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Company 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
Fund shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares of
Fund the with securities, instead of cash. If the Company 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 Company will
issue shares of the Fund at the NAV of the Fund determined as of the same
time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Fund;
. 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 Fund 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 Fund cannot exceed 5% of the net assets of
the Fund. 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 Fund investments.
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;
37
<PAGE>
. 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 Company 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 Company or UAMSSC may be liable for any losses due
to unauthorized or fraudulent telephone instructions if the Company or the
UAMSSC do not employ the procedures described above. Neither the Company 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 Fund 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 have 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 Company 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,
38
<PAGE>
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 Company will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Company will
pay your redemption proceeds earlier as applicable law so requires.
The Company 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
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or to fairly determine the value of its
assets; or
. for such other periods as the SEC may permit.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 do not
charge a sales commission or charge of any kind for exchanges.
Neither the Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
Board 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 other mutual funds in
the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Fund 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 Fund measure 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 Fund calculate their 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 Fund 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.
39
<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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of 10
Years or Since
One Year Five Years Inception Inception Date
========================================================================================================
<S> <C> <C> <C> <C>
ICM Small Company Portfolio 04/19/89
</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.
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.
40
<PAGE>
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 Fund's October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Fund's Annual Report is incorporated by
reference herein. Shareholders may get copies of the Fund's Annual Report
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 Fund.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
41
<PAGE>
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of the
series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their Funds.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
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.
42
<PAGE>
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.
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.
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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
--------------------------------------------------------------------------------
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;
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<PAGE>
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.
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.
45
<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.
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
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.
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
FI 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.
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<PAGE>
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.
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.
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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)
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.
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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.
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.
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<PAGE>
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.
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.
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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.
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.
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<PAGE>
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 Domestic Equity Portfolio
McKee International Equity Portfolio
McKee Small Cap Equity Portfolio
Institutional Class Shares
Statement of Additional Information
February __, 2001
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the Funds dated
February __, 2001, as supplemented from time to time. You may obtain the
Funds' prospectus by contacting the UAM Funds at the address listed
above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Description of Permitted Investments......................................... 1
Borrowing................................................................... 1
Debt Securities............................................................. 1
Derivatives................................................................. 7
Equity Securities........................................................... 15
Foreign Securities.......................................................... 17
Investment Companies........................................................ 21
Repurchase Agreements....................................................... 21
Restricted Securities....................................................... 21
Securities Lending.......................................................... 22
Short Sales................................................................. 22
When Issued Transactions.................................................... 23
Investment Policies of the Funds............................................. 23
Fundamental Policies........................................................ 24
Non-Fundamental Policies.................................................... 24
Management of the Company.................................................... 25
Board Members............................................................... 25
Officers.................................................................... 26
Principal Shareholders....................................................... Error! Bookmark not defined
Investment Advisory and Other Services....................................... 27
Investment Adviser.......................................................... 29
Distributor................................................................. 31
Shareholder Servicing Arrangements.......................................... 31
Administrative Services..................................................... 31
Custodian................................................................... 33
Independent Accountants..................................................... 33
CODE OF ETHICS.............................................................. 33
Brokerage Allocation and Other Practices..................................... 33
Selection of Brokers........................................................ 33
Simultaneous Transactions................................................... 34
Brokerage Commissions....................................................... 34
Capital Stock and Other Securities........................................... 34
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................................................................. 41
Financial Statements......................................................... 42
Glossary..................................................................... 42
Bond Ratings................................................................. 43
Moody's Investors Service, Inc.............................................. 43
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
As described in the Funds' prospectus, the Funds may use a variety of
investment strategies in addition to its principal investment strategies. This
SAI describes each of these investments/strategies and their risks. The Funds
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. You can find more information
concerning the limits on the ability of the Funds to use these investments in
"Investment Policies of the Funds?"
BORROWING
--------------------------------------------------------------------------------
The Funds may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 33 1\3% of its total assets (including
the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss. To
mitigate the risks of leverage, the Fund will limit the amount it may borrow
to not more than 33 1/3% of its total assets, taken at market value. In
addition, the Funds will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. The
Funds will not purchase securities while borrowings are outstanding except to
exercise prior commitments and to exercise subscription rights.
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 "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.
1
<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 the Funds.
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 considered the equivalent of treasury securities and are
backed by the full faith and credit of the U.S. government. 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 Fund shares. To buy GNMA
securities, the Funds may have to pay a premium over the maturity value of
the underlying mortgages, which the Fund 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.
2
<PAGE>
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. For example, payments of
interest and principal are more frequent (usually monthly) and their
interest rates are sometimes adjustable. In addition, 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 Funds 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.
The Funds 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.
3
<PAGE>
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Funds 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 Funds 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 Funds 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 Funds 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 Funds may invest in
commercial
4
<PAGE>
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 Funds' 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 Funds may record its
beneficial ownership of the coupon or corpus directly in the book-entry
record-keeping system.
5
<PAGE>
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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Funds
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 Funds. If left unattended,
drifts in the average maturity of the Funds can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Funds.
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Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Funds' average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Funds 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." If 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 Funds 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 Funds 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 Fund 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 Funds are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
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. Unless otherwise stated
in the Funds' prospectus, the Funds may use derivatives to gain exposure to
various markets in a cost efficient manner,
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to reduce transaction costs or to remain fully invested. The Funds may also
invest in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Funds 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 Funds
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 or custodian bank, 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 Funds may incur commission expenses when it opens or closes a futures
position.
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 Funds 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 Funds 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 Funds 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 Funds obtain the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The Funds would normally purchase call options in anticipation
of an increase in the market value of securities it owns or wants to buy. The
Funds 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 Funds 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 Funds 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 Funds
write 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 Funds 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 Funds 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 Funds 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 Funds would hope to profit by
closing out the put option at a lower price. If security prices fall, the
Funds 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 Funds 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 Funds 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 Funds would expect the option to expire and
the premium it received to offset the decline of the security's value.
However, the Funds 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 Funds are permitted only to write covered options. At the time of selling
the call option, the Funds may cover the option by owning:
. 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;
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. 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.
At the time of selling a put option, the Funds may cover the put option by:
. 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 Funds may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Funds 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 Funds 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 Funds 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 Funds 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 Funds
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 Funds.
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Combined Positions
The Funds 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 Funds 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 Funds 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 Funds
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 Funds 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 Funds 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 Funds could also hedge the position by
selling another currency expected to perform similarly to the currency in
which the Funds' 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 Funds 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 Funds 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
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currency that is purchased. Cross-hedges protect against losses resulting from
a decline in the hedged currency, but will cause the Funds 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 Funds 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 Funds
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 Funds 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 Funds. If a swap agreement calls for payments by the Funds, the Funds
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 Funds 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 Funds 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 Funds' gains
or losses. In order to reduce the risk associated with leveraging, the Funds
may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Funds 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 Funds' accrued obligations under the swap agreement
over the accrued amount the Funds are 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 Funds'
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 Funds 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, the Funds could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the Funds enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Funds may have to pay more
money than it receives. Similarly, if the Funds enter into a swap where it
agrees to exchange a fixed rate of interest for a floating rate of interest,
the Funds 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. The Funds 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 Funds than if it had not entered into any
derivatives transactions. Derivatives may magnify the Funds' 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
Funds holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Funds to greater risks.
Correlation of Prices
The Funds' 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 Funds are 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 Funds' prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Funds 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 Funds. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Funds against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Funds' 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 Funds' investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Funds can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Funds may close out a futures contract only on the exchange the
contract was initially traded. Although the Funds intend 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 Funds may not be able
to close out its position. In an illiquid market, the Funds 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
Funds may lose money by investing in derivatives. For example, if the Funds
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
Funds could be required to sell the security upon exercise at a price below
the current market price. Similarly, if the Funds 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 Funds 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:
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. 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, the Funds 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 Funds and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Funds may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Funds 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuer's
common stock at the Fund's option during a specified time period (such as
convertible preferred stocks, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer's capital structure, but is usually subordinated to
similar non-convertible securities. 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. In general, the market value of
a convertible security is at least the higher of its "investment value' (i.e.,
its value as a fixed income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of
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a convertible security is more volatile during times of steady interest rates
than other types of debt securities. The price of a convertible security tends
to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. Government securities and (ii) call options or warrants
on the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has
similar investment characteristics, but may differ with respect to credit
quality, time to maturity, trading characteristics, and other factors. Because
the Fund will create synthetic convertible positions only out of high grade
fixed income securities, the credit rating associated with the Fund's
synthetic convertible investments is generally expected to be higher than that
of the average convertible security, many of which are rated below high grade.
However, because the options used to create synthetic convertible positions
will generally have expirations between one month and three years of the time
of purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset (in
the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences in
maturities, and the Adviser and applicable sub-adviser take such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Fund may extend the maturity by investing in a new option with longer maturity
on the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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
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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;
. 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
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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;
. 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
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. 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 Funds ability to invest in a particular country or make it
very expensive for the Funds 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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as,
those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. 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 Funds to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the Funds receive from its investments. The Funds do 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 Funds also anticipates pricing, trading, settling
and valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the Funds expect 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?
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INVESTMENT COMPANIES
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The Funds 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 Funds. Like other shareholders, the Funds would
pay its proportionate share of those fees. Consequently, shareholders of the
Funds would pay not only the management fees of the Fund, but also the
management fees of the investment company in which the Fund invests. The
Funds 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 Funds in the UAM Complex 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 Funds' investment policies and restrictions; and
. The Funds' adviser waives any fees it earns on the assets of the Fund that
is invested in the UAM DSI Money Market Portfolio.
The Funds 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 Funds normally use repurchase agreements to earn
income on assets that are not invested.
When the Funds enter 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 Funds' right to sell the
security may be restricted. In addition, the value of the security might
decline before the Funds can sell it and the Funds might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Funds may purchase restricted securities that are not registered for sale
to the general public. The Funds may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Funds' investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Funds
or less than what may be considered the fair value of such securities.
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SECURITIES LENDING
--------------------------------------------------------------------------------
The Funds 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. If the Funds lend 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
Funds 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 Funds lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Funds 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.
SHORT SALES
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Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Funds can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Funds replace the
borrowed security. Likewise, the Funds can profit if the price of the security
declines between those dates.
To borrow the security, the Funds also may be required to pay a premium, which
would increase the cost of the security sold. The Funds will incur transaction
costs in effecting short sales. The Funds' gains and losses will be decreased
or increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Funds may be required to pay in connection with a
short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
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Short Sales Against the Box
In addition, the Funds may engage in short sales "against the box." In a
short sale against the box, the Funds agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no extra
cost. The Funds will incur transaction costs to open, maintain and close short
sales against the box.
Restrictions on Short Sales
The Funds will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Funds net
assets.
. The market value of the securities of any single issuer that have been sold
short by the Funds would exceed the two percent (2%) of the value of the
Funds' net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Funds sell a security short, its custodian segregates an amount
of cash or liquid securities equal to the difference between (a) the market
value of the securities sold short at the time they were sold short and (b)
any cash or U.S. Government securities the Funds are required to deposit with
the broker in connection with the short sale (not including the proceeds from
the short sale). The segregated assets are marked to market daily in an
attempt to ensure that the amount deposited in the segregated account plus the
amount deposited with the broker is at least equal to the market value of the
securities at the time they were sold short.
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 Funds contract 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 Funds have
committed to purchase before the securities are delivered, although the Funds
may earn income on securities it has in a segregated account. The Funds 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 Funds would use 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 Funds engage 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 Funds 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 Funds assume 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 Funds do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the Funds
The Funds 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 Funds 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 that the
Funds cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Funds will not:
. With respect to McKee Small Cap Equity Portfolio, make any investment
inconsistent with its classification as a diversified series of an open-end
investment company under the 1940 Act. This restriction does not, however,
apply to any portfolio classified as a non-diversified series of an open-end
investment company under the 1940 Act.
. Borrow money, except to the extent permitted by applicable law, as amended and
interpreted or modified from time to time by any regulatory authority having
jurisdiction and the guidelines set forth in a Fund's prospectus and statement
of additional information as they may be amended from time to time.
. Issue senior securities, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933 in
connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by applicable
law, as amended and interpreted or modified from time to time by any
regulatory authority having jurisdiction, (2) that a Fund may invest in,
securities of issuers that deal or invest in real estate and (3) that a Fund
may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction and
the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall not
be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Funds may
change them without shareholder approval. The Funds may:
. purchase and sell currencies or securities on a when-issued, delayed delivery
or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency and
foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of its
investable assets in securities of a single open-end management investment
company with substantially the same investment objectives, policies and
limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Funds intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities, including
(1) treating as illiquid securities that may not be disposed of in the
ordinary course of business within 7 days at approximately the value at which
the portfolio has valued the investment on its books; and (2) limiting its
holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
24
<PAGE>
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other institutional
investors. These loans may not exceed 33 1/3% of the portfolio's total assets
taken at market value. In addition, a Fund must receive at least 100%
collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events per
year.
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting
fee and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Funds in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr. English
has an investment advisory relationship with Investment Counselors of
Maryland, an investment adviser to one of the Funds in the UAM Funds Complex.
However, the Company does not believe that the relationship is a material
business relationship, and, therefore, does not consider him to be an
interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management Company,
RR2 Box 700 Inc. and Great Island Investment Company, Inc. (investment
Center Harbor, NH 03226 management). From 1988 to 1993, Mr. Bennett was President of
1/26/29 Bennett Management Company. Mr. Bennett serves on the Board of
each Company in the UAM Funds Complex.
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn was
Washington, DC 20037 Vice President for Finance and Administration and Treasurer of
8/14/51 Radcliffe College (Education). Ms. Dunn serves on the Board of
each Company in the UAM Funds Complex.
----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June 1998
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law firm
Dechert Price & Rhoads from July 1976 to June 1998. He was also
formerly a Director of Hofler Corp. (manufacturer of gear
grinding machines). Mr. Humenuk serves on the Board of each
Company in the UAM Funds Complex.
----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the investment
Baltimore, MD 21201 management business. He is also Chairman of the Board of Chektec
8/5/48 Corporation (Drugs) and Cyber Scientific, Inc. (computer mouse
company). Mr. English serves on the Board of each Company in the
UAM Funds Complex.
----------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since May
One International Place 2000; Chairman and Chief Executive Officer of UNUM Corporation 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee of Bates College and the
3/5/43 Committee for Economic Development; Chairman-elect of the Board
of Trustees of the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of Public Health; Director
of the Nashua Corporation and the National Alliance of Business.
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides information
regarding their present positions, date of birth, address and their principal
occupations during the past five years. The Company's officers are paid by
UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James F. Orr III* Board President, Chief Executive Officer and Director of 0 0
One International Place Member UAM since May 2000; Chairman and Chief Executive
Boston, MA 02110 President Officer of UNUM Corporation (Insurance) from 1988 to
3/5/43 1999; Trustee of Bates College and the Committee for
Economic Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for Society,
and the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua Corporation
and the National Alliance of Business.
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer) since
April 2000; Senior Vice President and Secretary of
Signature Financial Group, Inc. (financial services)
and affiliated broker-dealers from 1991 to 2000;
Director and Secretary of Signature Financial Group
Europe, Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000; Secretary of the 59
Wall Street Family of Mutual Funds (mutual funds)
from 1996 to 2000.
----------------------------------------------------------------------------------------------------------------------------------
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.
----------------------------------------------------------------------------------------------------------------------------------
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer of
Boston, MA 02110 UAMFDI (broker-dealer) since February 2000; Assistant
12/23/63 Vice President of Scudder Kemper Investments
(financial services) from May 1992 to February 1998.
----------------------------------------------------------------------------------------------------------------------------------
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 December 15, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Shares Owned Portfolio Class
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Carey & CO 10.41% McKee Domestic Institutional
PO Box 1558 Equity Portfolio Class Shares
Columbus, OH 43260-0002
------------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co 15.15% 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 16.07% McKee Domestic Institutional
FBO Morgantown Utility Equity Portfolio Class Shares
Attn: Security Cage
Mail Street 1510
PO Box 1793
Charleston, WV 25326-1793
------------------------------------------------------------------------------------------------------------------------------
Saxon & CO 12.02% McKee Domestic Institutional
Borough of Canonsburg Equity Portfolio Class Shares
68 E. Pike Street
Canonsburg, PA 15317-1312
------------------------------------------------------------------------------------------------------------------------------
City of St. Marys Police Pension Fund 9.75% McKee Domestic Institutional
808 S. Michael Road Equity Portfolio Class Shares
P.O. Box 1994
Saint Marys, PA 15857-5994
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Shares Owned Portfolio Class
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Economy Bourough Employees Fund 6.48% McKee Domestic Institutional
C/O Controllers Office Equity Portfolio Class Shares
2856 Conway Wallrose Road
Baden, PA 15005-2306
------------------------------------------------------------------------------------------------------------------------------
Saxon & CO 6.32% McKee Domestic Institutional
Canonsburg Non-Uniform Equity Portfolio Class Shares
Borough of Cannonsburg
68 E. Pike Street
Canonsburg, PA 15317-1312
------------------------------------------------------------------------------------------------------------------------------
Saxon & CO 14.44% McKee International Institutional
FBO Westmoreland County Employees Equity Portfolio Class Shares
Retirement Fund
PO Box 7780
Philadelphia, PA 19182-00011312
------------------------------------------------------------------------------------------------------------------------------
MAC & CO 13.24% McKee International Institutional
A/C MIDF 8346BN2 Equity Portfolio Class Shares
Mutual Funds Operations
PO Box 3198
Pittsburgh, PA 15230-3198
------------------------------------------------------------------------------------------------------------------------------
Fulvest & CO 9.40% McKee International Institutional
FBO Lancaster County Era Equity Portfolio Class Shares
PO Box 3215
Lancaster, PA 17604-3215
------------------------------------------------------------------------------------------------------------------------------
AllFirst Trust CO NA 9.06% 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. 5.33% McKee International Institutional
FBO Cumberland County City Employees RetiremenCUST Equity Portfolio Class Shares
PO Box 7780-1888
Philadelphia, PA 19182-0001
------------------------------------------------------------------------------------------------------------------------------
ALTRU Company 5.22% McKee International Institutional
PO Box 2450 Equity Portfolio Class Shares
Altoona, PA 16603-2450
------------------------------------------------------------------------------------------------------------------------------
Light & CO 28.08% 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
------------------------------------------------------------------------------------------------------------------------------
MAC & CO 17.19% McKee Small Cap Institutional
A/C MIDF 52561W2 Equity Portfolio Class Shares
Mutual Funds Operations
PO Box 3198
Pittsburgh, PA 15230-3198
------------------------------------------------------------------------------------------------------------------------------
MAC & CO 12.95% McKee Small Cap Institutional
A/C MIDF 8346BN2 Equity Portfolio Class Shares
PO Box 3198
Pittsburgh, PA 15230-3198
------------------------------------------------------------------------------------------------------------------------------
Dickey & CO 5.52% McKee Small Cap Institutional
FBO Somerset County Retirement Fund Equity Portfolio Class Shares
PO Box 777
Somerset, PA
------------------------------------------------------------------------------------------------------------------------------
First Union National Bank 7.96% McKee Small Cap Institutional
FBO Lackawanna City Employees Retirement Fund Equity Portfolio Class Shares
1525 West WT Harris Blvd CMG NC 1151
Charlotte, NC 28262-8522
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Shares Owned Portfolio Class
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</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 December 15,
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
--------------------------------------------------------------------------------
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. United Asset Management Corporation is a wholly-owned subsidiary of Old
Mutual plc, a United Kingdom based financial services group.
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 Company has filed each agreement with the SEC as
part of its registration statement on Form N-1A.
<PAGE>
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the Funds' assets;
. Continuously reviews, supervises and administers the investment
program of the Funds; and
. Determines what portion of the Funds' 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 Company, 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 Funds.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Funds' 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
Company.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
Advisory Fees
For its services, the Funds pay its adviser the following annual fees,
which are expressed as a percentage of the average daily net assets of each
Fund. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that the Funds pay 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 Funds paid the following in management
fees to the adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Paid
===================================================================================
<S> <C>
Domestic Equity Portfolio
2000
-----------------------------------------------------------------------------------
1999 $ 302,499
1998 $ 418,475
-----------------------------------------------------------------------------------
International Equity Portfolio
2000
-----------------------------------------------------------------------------------
1999 $1,051,174
1998 4 857,075
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Investment Advisory Fees Paid
================================================================================
Small Cap Equity Portfolio
<S> <C>
2000
--------------------------------------------------------------------------------
1999 $ 824,282
1998 $ 675,734
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for each Fund of the Company. The Company
offers its shares continuously. While UAMFDI will use its best efforts to
sell shares of the Funds, 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 Company or the Funds. 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 Funds.
ADMINISTRATIVE SERVICES
--------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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 Company. UAMFSI will pay such people for
such employment. The Company will not incur any obligations with respect to
such people. Other expenses incurred in the operation of the Company will be
borne by the Company 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.
31
<PAGE>
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Funds.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as follows:
. $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 Fund at the
following rates:
<TABLE>
<CAPTION>
Annual Rate
============================================================================
<S> <C>
Domestic Equity Portfolio 0.043%
----------------------------------------------------------------------------
International Equity Portfolio 0.063%
----------------------------------------------------------------------------
Small Cap Equity Portfolio 0.043%
</TABLE>
2. An annual fee to UAMFSI for sub-administration and other services, which
UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Funds paid the following in administration
and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator;s Fee Total Administration Fee
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
Domestic Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------
1999 $ 27,987 $ 70,883 $ 98,870
1998 $112,236 $ 83,629 $195,065
----------------------------------------------------------------------------------------------------------
International Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------
1999 $104,039 $109,597 $213,636
1998 $198,575 $120,940 $319,515
----------------------------------------------------------------------------------------------------------
Small Cap Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------
1999 $ 43,277 $ 71,221 $114,498
1998 $ 93,068 $ 63,571 $156,639
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a code
of ethics under Rule 17j-1 of the 1940 Act that permits investment personnel
to purchase and sell securities for their personal account.
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 Funds. The Investment Agreement also directs the adviser to use its
best efforts to obtain the best execution with respect to all transactions for
the Funds. 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 Funds 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. Research services provided by brokers
through which the Fund effects securities transactions may be used by the
portfolio's investment adviser in servicing all of its accounts and not all of
these services may be used by the adviser in connection with the portfolio.
Such research include research reports on particular industries and companies,
economic surveys and analyses, recommendations as to specific securities and
other products or services (e.g., quotation equipment and computer related
costs and expenses), advice concerning the value of securities, the
advisability of investing in, purchasing or selling securities, the
availability of securities or the purchasers or sellers of securities,
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts,
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____ of
the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers or
dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions with
dealers, the investment adviser may also consider the amount of portfolio
shares a broker-dealer has sold and the referral of other clients by the
broker to the
33
<PAGE>
adviser, subject to the requirements of best execution described above. In
addition, the portfolio may place trades with qualified broker-dealers who
recommend the portfolio or who act as agents in the purchase of portfolio
shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for each Fund 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 Funds, in a fair and reasonable
manner. Although there is no specified formula for allocating such
transactions, the Company'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 Funds 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 Funds execute 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 two fiscal years, the portfolios paid the following in brokerage
commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
===========================================================================
<S> <C>
Domestic Equity Portfolio
2000
---------------------------------------------------------------------------
1999 $110,547
---------------------------------------------------------------------------
International Equity Portfolio
2000
---------------------------------------------------------------------------
1999 $339,129
---------------------------------------------------------------------------
Small Cap Equity Portfolio
2000
---------------------------------------------------------------------------
1999 $212,727
</TABLE>
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Company
34
<PAGE>
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
Company's McKee Small Cap Value Portfolio is is an diversified, open-end
management company. This means that with respect to 75% of its total assets,
the Funds may not invest more than 5% of its total assets in the securities of
any one issuer (other than U.S. Government Securities). The McKee Domestic
Equity, and International Equity Portfolios are non-diversified.
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the Company
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
Company. 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
Company's governing board.
If the Company is liquidated, the shareholders of each Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or in
the case of a class, belonging to that Fund and allocable to that class. The
Company will distribute is net assets to its shareholders in proportion to the
number of shares of that Fund or class thereof held by them and recorded on
the books of the Company. The liquidation of any Fund or class thereof may be
authorized at any time by vote of a majority of the members of the governing
board.
The Company will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing and
the distribution of such shares pursuant to a distribution plan or other
12b-1 plan;
. Institutional Service 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;
and
. Advisor 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. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Funds at NAV
(as of the business day following the record date). Shareholders may change
their dividend and distributions option by writing to the Funds at least three
days before the record date for income dividend or capital gain distribution.
Each Fund send account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The Funds intend 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 it generally will be relieved of federal income
and excise taxes. If the Fund were to fail to make sufficient distributions in
a year, it would be subject to corporate income taxes and/or excise taxes. In
addition, if the shortfall were large enough, the Funds could be disqualified
as a regulated investment company. If a Fund was 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. Moreover, if a Fund was to
fail to make sufficient distributions in a year, the Fund would be subject to
corporate income taxes and/or excise taxes in respect of the shortfall or, if
the shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year period
ending October 31 of such calendar year and 100% of any such amounts that were
not distributed in the prior year. The Funds intend to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Fund on December
31 of such year if such dividends are actually paid during January of the
following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Funds is equal to the
NAV of its Fund. The Fund calculates its NAV 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
36
<PAGE>
. Total assets include the market value of the securities held by the Fund,
plus cash and other assets plus income accrued but not yet received.
Each Fund 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
Funds must receive proper payment for the order by the time it calculates its
NAV on the following business day. Service Agents are responsible to their
customers and the Company 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 the Funds. The Company will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Company 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
Funds' shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares of
Funds the with securities, instead of cash. If the Company allows a
shareholder to make an in-kind purchase, it will value such securities
according to the
37
<PAGE>
policies described under "How the Fund Values it Assets" at the next
determination of net asset value after acceptance. The Company will issue
shares of the Funds at the NAV of the Fund determined as of the same time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Funds;
. 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 Funds and are delivered to the Funds
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 Funds cannot exceed 5% of the net assets of
the Funds. 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 Funds' investments.
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 Company 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 Company or UAMSSC may be liable for any losses due
to unauthorized or fraudulent telephone instructions if the Company or the
UAMSSC do not employ the procedures described above. Neither the Company nor
the UAMSSC will be responsible
38
<PAGE>
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 Funds to make payment wholly or
partly in cash, the Funds may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the Funds 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 Funds have 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 Funds 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 Funds. 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 Company 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 Company will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Company will
pay your redemption proceeds earlier as applicable law so requires.
The Company 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
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or to fairly determine the value of its
assets; or
. for such other periods as the SEC may permit.
39
<PAGE>
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
Board 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 other mutual funds in
the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Funds to another person by making a
written request to the Funds. 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 Funds measure 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 Funds calculate their 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 Funds 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 Funds 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).
40
<PAGE>
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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of 10Years or 30-Day
One Year Five Years Since Inception Yield Inception Date
=================================================================================================================
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------
Domestic Equity Portfolio [ ]% N/A [ ]% N/A 12/31/98
-----------------------------------------------------------------------------------------------------------------
International Equity Portfolio [ ]% [ ]% [ ]% N/A 12/31/99
-----------------------------------------------------------------------------------------------------------------
Small Cap Equity Portfolio [ ]% N/A [ ]% 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
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.
41
<PAGE>
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 Funds' October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Funds' Annual Reports are incorporated by
reference herein. Shareholders may get copies of the Funds' 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 Funds.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund`s Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of the
series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their Funds.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
42
<PAGE>
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-shareholder-
servicing agent.
Bond Ratings
MOODY'S INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
Preferred Stock Ratings
<TABLE>
<S> <C>
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 classification: the modifier 1 indicates
minus (-) 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.
</TABLE>
Debt Ratings - Taxable Debt & Deposits Globally
<TABLE>
<S> <C>
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.
</TABLE>
43
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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:
44
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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.
<TABLE>
<S> <C>
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.
</TABLE>
45
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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.
<TABLE>
<S> <C>
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.
</TABLE>
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
<TABLE>
<S> <C>
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.
</TABLE>
46
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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
<TABLE>
<S> <C>
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 but may vary slightly from time to
AA- 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 prudent investment. Considerable
BBB- variability in risk during economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when due. Present or prospective
BB- financial protection factors fluctuate according to industry conditions. Overall quality may move up or
down frequently within this category.
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
Short-Term Debt
High Grade
<TABLE>
<S> <C>
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.
</TABLE>
Good Grade
<TABLE>
<S> <C>
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.
</TABLE>
Satisfactory Grade
<TABLE>
<S> <C>
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.
</TABLE>
Non-Investment Grade
<TABLE>
<S> <C>
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.
</TABLE>
Default
<TABLE>
<S> <C>
D-5 Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
48
<PAGE>
FITCH IBCA RATINGS
--------------------------------------------------------------------------------
International Long-Term Credit Ratings
Investment Grade
<TABLE>
<S> <C>
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.
</TABLE>
Speculative Grade
<TABLE>
<S> <C>
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.
</TABLE>
49
<PAGE>
International Short-Term Credit Ratings
<TABLE>
<S> <C>
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.
</TABLE>
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.
50
<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 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.
51
<PAGE>
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.
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 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 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 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 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 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 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 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 Growth Index - measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth
values.
Russell 2500 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.
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 __, 2001
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the Fund dated February __,
2001, as supplemented from time to time. You may obtain the Fund's prospectus by
contacting the UAM Funds at the address listed above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments.............................................. 1
Borrowing........................................................................ 1
Debt Securities.................................................................. 1
Derivatives...................................................................... 7
Equity Securities................................................................ 15
Foreign Securities............................................................... 17
Investment Companies............................................................. 20
Repurchase Agreements............................................................ 21
Restricted Securities............................................................ 21
Securities Lending............................................................... 21
Short Sales...................................................................... 22
When Issued Transactions......................................................... 23
Investment Policies of the FUND................................................... 23
Fundamental Policies............................................................. 23
Non-Fundamental Policies......................................................... 24
Management of the Company......................................................... 25
Board Members.................................................................... 25
Officers......................................................................... 26
Principal Shareholders............................................................ 27
Investment Advisory and Other Services............................................ 27
Investment Adviser............................................................... 27
Distributor...................................................................... 29
Service And Distribution Plans................................................... 29
Administrative Services.......................................................... 31
Custodian........................................................................ 33
Independent Accountants.......................................................... 33
CODE OF ETHICS................................................................... 33
Brokerage Allocation and Other Practices.......................................... 33
Selection of Brokers............................................................. 33
Simultaneous Transactions........................................................ 34
Brokerage Commissions............................................................ 34
Capital Stock and Other Securities................................................ 34
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...................................................................... 41
Financial Statements.............................................................. 42
Glossary.......................................................................... 42
Bond Ratings...................................................................... 43
Moody's Investors Service, Inc................................................... 43
Standard & Poor's Ratings Services............................................... 45
Duff & Phelps Credit Rating Co................................................... 47
Fitch IBCA Ratings............................................................... 48
Comparative Benchmarks............................................................ 50
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Fund's prospectus, the Fund may use a variety of
investment strategies in addition to its principal investment strategies.
This SAI describes each of these investments/strategies and their risks.
The Fund may not notify shareholders before employing new strategies,
unless it expects such strategies to become principal strategies. You can
find more information concerning the limits on the ability of the Fund to
use these investments in "Investment Policies of the Fund?"
BORROWING
--------------------------------------------------------------------------------
The Fund may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 331/3% of its total assets
(including the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the
extent permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss.
To mitigate the risks of leverage, the Fund will limit the amount it may
borrow to not more than 33 1/3% of its total assets, taken at market value.
In addition, the Fund will only borrow from banks as a temporary measure
for extraordinary or emergency purposes such as the redemption of Fund
shares. The Fund will not purchase securities while borrowings are
outstanding except to exercise prior commitments and to exercise
subscription rights.
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
"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.
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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 Fund.
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 considered the equivalent of treasury securities and are
backed by the full faith and credit of the U.S. government. 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 Fund shares. To buy GNMA
securities, the Fund may have to pay a premium over the maturity value of
the underlying mortgages, which the Fund 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
2
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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. For example, payments of
interest and principal are more frequent (usually monthly) and their
interest rates are sometimes adjustable. In addition, 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 Fund 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.
The Fund 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.
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<PAGE>
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Fund 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 Fund 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
Fund 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 Fund 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 Fund 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
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<PAGE>
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 Fund'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 Fund may record its beneficial ownership of the coupon or
corpus directly in the book-entry record-keeping system.
5
<PAGE>
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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Fund
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 Fund. If left unattended,
drifts in the average maturity of the Fund can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Fund.
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<PAGE>
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Fund's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Fund 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." If 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 Fund 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 Fund 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 Fund 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 Fund are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise stated
in the Fund's prospectus, the Fund may use derivatives to gain exposure to
various markets in a cost efficient manner, to
7
<PAGE>
reduce transaction costs or to remain fully invested. The Fund may also invest
in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Fund 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 Fund
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 or custodian bank, 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 Fund may incur commission expenses when it opens or closes a futures
position.
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 Fund 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 Fund 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
Fund 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 Fund obtain the right
to purchase, rather than sell, the underlying instrument at the option's
strike price. The Fund would normally purchase call options in anticipation of
an increase in the market value of securities it owns or wants to buy. The
Fund 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 Fund 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 Fund 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 Fund
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 Fund 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 Fund 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 Fund 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 Fund would hope to profit by closing out the
put option at a lower price. If security prices fall, the Fund 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 Fund 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 Fund 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 Fund would expect the option to expire and the
premium it received to offset the decline of the security's value. However,
the Fund 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 Fund is permitted only to write covered options. At the time of selling
the call option, the Fund may cover the option by owning:
. 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.
At the time of selling a put option, the Fund may cover the put option by:
. 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 Fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Fund 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 Fund 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 Fund 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 Fund 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 Fund
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 Fund.
Combined Positions
The Fund 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 Fund could construct
a
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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 Fund 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 Fund
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 Fund 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 Fund 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 Fund could also hedge the position by
selling another currency expected to perform similarly to the currency in
which the Fund'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 Fund 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 Fund 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 Fund 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.
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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 Fund 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 Fund
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 Fund 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 Fund. If a swap agreement calls for payments by the Fund, the Fund
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 Fund 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 Fund 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 Fund's gains
or losses. In order to reduce the risk associated with leveraging, the Fund
may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Fund 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 Fund's accrued obligations under the swap agreement
over the accrued amount the Fund are 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 Fund'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 Fund 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, the Fund could lose money by
investing in an interest rate swap if interest rates change adversely. For
example, if the Fund enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Fund may have to pay more
money than it receives. Similarly, if the Fund enter into a
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swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the Fund 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. The Fund 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 Fund than if it had not entered into any
derivatives transactions. Derivatives may magnify the Fund'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
Fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Fund to greater risks.
Correlation of Prices
The Fund'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 Fund are 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 Fund's prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Fund 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 Fund. A currency hedge, for example, should protect
a yen-denominated security from a decline in the yen, but will not protect
the Fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the Fund'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 Fund's investments precisely over
time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Fund can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Fund may close out a futures contract only on the exchange
the contract was initially traded. Although the Fund intend 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 Fund may
not be able to close out its position. In an illiquid market, the Fund 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 Fund may lose money by investing in derivatives. For example, if the
Fund 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 Fund could be required to sell the security upon exercise at a
price below the current market price. Similarly, if the Fund 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
Fund 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, the Fund 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
Fund and it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Fund 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the
issuer's common stock at the Fund's option during a specified time period
(such as convertible preferred stocks, convertible debentures and
warrants). A convertible security is generally a fixed income security that
is senior to common stock in an issuer's capital structure, but is usually
subordinated to similar non-convertible securities. 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. In
general, the market value of a convertible security is at least the higher
of its "investment value' (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock).
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. The price of a convertible security tends to increase as
the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying common stock declines.
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A synthetic convertible security is a combination investment in which the
Fund purchases both (i) high-grade cash equivalents or a high grade debt
obligation of an issuer or U.S. Government securities and (ii) call options
or warrants on the common stock of the same or different issuer with some
or all of the anticipated interest income from the associated debt
obligation that is earned over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a
similar non-convertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in
the capital appreciation attendant upon a market price advance in the
convertible security's underlying common stock. A synthetic convertible
position has similar investment characteristics, but may differ with
respect to credit quality, time to maturity, trading characteristics, and
other factors. Because the Fund will create synthetic convertible positions
only out of high grade fixed income securities, the credit rating
associated with the Fund's synthetic convertible investments is generally
expected to be higher than that of the average convertible security, many
of which are rated below high grade. However, because the options used to
create synthetic convertible positions will generally have expirations
between one month and three years of the time of purchase, the maturity of
these positions will generally be shorter than average for convertible
securities. Since the option component of a convertible security or
synthetic convertible position is a wasting asset (in the sense of losing
"time value" as maturity approaches), a synthetic convertible position may
lose such value more rapidly than a convertible security of longer
maturity; however, the gain in option value due to appreciation of the
underlying stock may exceed such time value loss, the market price of the
option component generally reflects these differences in maturities, and
the Adviser and applicable sub-adviser take such differences into account
when evaluating such positions. When a synthetic convertible position
"matures" because of the expiration of the associated option, the Fund may
extend the maturity by investing in a new option with longer maturity on
the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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.
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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
17
<PAGE>
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 Fund
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 Fund ability to invest in
a particular country or make it very expensive for the Fund to invest
in that country. Some countries require prior governmental
18
<PAGE>
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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient
as, those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum
rates, as opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While the UAM Fund 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.
19
<PAGE>
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the Fund to recover a
portion of these taxes, the portion that cannot be recovered will reduce
the income the Fund receive from its investments. The Fund do 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 Fund also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
Fund expect 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 Fund 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 Fund. Like other shareholders, the Fund
would pay its proportionate share of those fees. Consequently, shareholders
of the Fund would pay not only the management fees of
20
<PAGE>
the Fund, but also the management fees of the investment company in which
the Fund invests. The Fund 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 Fund in the UAM Complex 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 Fund's investment policies and restrictions; and
. The Fund's adviser waives any fees it earns on the assets of the Fund
that is invested in the UAM DSI Money Market Portfolio.
The Fund 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 Fund normally use repurchase agreements to earn
income on assets that are not invested.
When the Fund enter 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 Fund's right to sell the
security may be restricted. In addition, the value of the security might
decline before the Fund can sell it and the Fund might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Fund may purchase restricted securities that are not registered for
sale to the general public. The Fund may also purchase shares 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 may not be treated as illiquid securities for
purposes of the Fund's investment limitations. The price realized from the
sales of these securities could be more or less than those originally paid
by the Fund or less than what may be considered the fair value of such
securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Fund 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. If the Fund lend 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;
21
<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
Fund 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 Fund lend securities, there is a risk that the borrower will
become financially unable to honor its contractual obligations. If this
happens, the Fund 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does
not own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Fund can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the Fund
replace the borrowed security. Likewise, the Fund can profit if the price
of the security declines between those dates.
To borrow the security, the Fund also may be required to pay a premium,
which would increase the cost of the security sold. The Fund will incur
transaction costs in effecting short sales. The Fund's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the Fund may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, the Fund may engage in short sales "against the box." In a
short sale against the box, the Fund agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no
extra cost. The Fund will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
The Fund will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Fund net
assets.
22
<PAGE>
. The market value of the securities of any single issuer that have been
sold short by the Fund would exceed the two percent (2%) of the value
of the Fund's net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever the Fund sell a security short, its custodian segregates an amount
of cash or liquid securities equal to the difference between (a) the market
value of the securities sold short at the time they were sold short and (b)
any cash or U.S. Government securities the Fund are required to deposit
with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated assets are marked to market
daily in an attempt to ensure that the amount deposited in the segregated
account plus the amount deposited with the broker is at least equal to the
market value of the securities at the time they were sold short.
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 Fund contract 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 Fund have committed to purchase before the
securities are delivered, although the Fund may earn income on securities
it has in a segregated account. The Fund 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 Fund would use 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 Fund engage 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
Fund 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 Fund assume 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 Fund do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the FUND
The Fund 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
Fund 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 that the
Fund cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Fund will not:
. Make any investment inconsistent with its classification as a
diversified series of an open-end investment company under the 1940
Act. This restriction does not, however, apply to any Fund classified
as a non-diversified series of an open-end investment company under
the 1940 Act.
. Borrow money, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any
regulatory authority having jurisdiction and the guidelines set forth
in a Fund's prospectus and statement of additional information as they
may be amended from time to time.
23
<PAGE>
. Issue senior securities, except to the extent permitted by applicable law,
as amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest
in, securities of issuers that deal or invest in real estate and (3) that a
Fund may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under
the Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Fund may
change them without shareholder approval. The Fund may:
. purchase and sell currencies or securities on a when-issued, delayed
delivery or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency
and foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of
its investable assets in securities of a single open-end management
investment company with substantially the same investment objectives,
policies and limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Fund intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities,
including (1) treating as illiquid securities that may not be disposed of
in the ordinary course of business within 7 days at approximately the value
at which the portfolio has valued the investment on its books; and (2)
limiting its holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other
institutional investors. These loans may not exceed 33 1/3% of the
portfolio's total assets taken at market value. In addition, a Fund must
receive at least 100% collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
24
<PAGE>
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies
the Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events
per year.
In addition, the Company reimburses each Independent Director for travel
and other expenses incurred while attending board meetings. The $3,000
meeting fee and expense reimbursements are aggregated for all of the
Directors and allocated proportionately among all Fund in the UAM Complex.
The Company does not pay its Interested Directors or officers for their
services as Directors or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr.
English has an investment advisory relationship with Investment Counselors
of Maryland, an investment adviser to one of the Funds in the UAM Funds
Complex. However, the Company does not believe that the relationship is a
material business relationship, and, therefore, does not consider him to be
an interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation From
Name, Address, Date of from Company as of UAM Funds Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment
RR2 Box 700 Management Company, Inc. and Great Island
Center Harbor, NH 03226 Investment Company, Inc. (investment management).
1/26/29 From 1988 to 1993, Mr. Bennett was President of
Bennett Management Company. Mr. Bennett serves on
the Board of each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife
1250 24th St., NW Fund (nonprofit), since January 1999. From 1991 to
Washington, DC 20037 Vice President for Finance and Administration and
8/14/51 Treasurer of Radcliffe College (Education). Ms. Dunn
serves on the Board of each Company in the UAM Funds
Complex.
------------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President
10401 N. Meridian St Administration, General Counsel and Secretary of Lone
Suite 400 Star Industries Inc. (cement and ready-mix concrete)
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous
scrap since March 2000. From June 1998 processing,
brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the
law firm Dechert Price & Rhoads from July 1976 to June
1998. He was also formerly a Director of Hofler Corp.
(manufacturer of gear grinding machines). Mr. Humenuk
serves on the Board of each Company in the UAM Funds
Complex.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation From
Name, Address, Date of from Company as of UAM Funds Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the
Baltimore, MD 21201 investment management business. He is also Chairman of
8/5/48 the Board of Chektec Corporation (Drugs) and Cyber
Scientific, Inc. (computer mouse company). Mr. English
serves on the Board of each Company in the UAM Funds
Complex.
-----------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM
One International Place since May 2000; Chairman and Chief Executive Officer of 0 0
Boston, MA 02110 UNUM Corporation (Insurance) from 1988 to 1999; Trustee
3/5/43 of Bates College and the Committee for Economic
Development; Chairman-elect of the Board of Trustees of
the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the
Health of the Nashua Corporation and the National
Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides
information regarding their present positions, date of birth, address and
their principal occupations during the past five years. The Company's
officers are paid by UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From From the Fund
Name, Address, Date of Position the Fund as Complex as of
Birth with Fund Principal Occupations During the Past 5 years of October 31, 1999 October 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
James F. Orr III* Board Member President, Chief Executive Officer and Director 0 0
One International Place President of UAM since May 2000; Chairman and Chief
Boston, MA 02110 Executive Officer of UNUM Corporation (Insurance)
3/5/43 from 1988 to 1999; Trustee of Bates College and
the Committee Economic for Development; Chairman-
elect of the Trustees of the Rockefeller
Foundation; Member of The Board of Business
Roundtable, the Harvard Center for Society, and
the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua
Corporation and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer)
since April 2000; Senior Vice President and
Secretary of Signature Financial Group, Inc.
(financial services) and affiliated broker-dealers
from 1991 to 2000; Director and Secretary of
Signature Financial Group Europe, Ltd. (financial
services) from 1995 to 2000; Secretary of the
Citigroup Family of Mutual Funds (mutual funds) from
1996 to 2000; Secretary of the 59 Wall Street Family
of Mutual Funds (mutual funds) from 1996 to 2000.
------------------------------------------------------------------------------------------------------------------------------------
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
7/4/51 Investments from November 1990 to March 1995.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Aggregate Compensation
Compensation From From the Fund
Name, Address, Date of Position the Fund as Complex as of
Birth with Fund Principal Occupations During the Past 5 years of October 31, 1999 October 31, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer
Boston, MA 02110 of UAMFDI (broker-dealer) since February 2000;
12/23/63 Assistant Vice President of Scudder Kemper
Investments (financial services) from May 1992
to February 1998.
------------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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>
Engineers Joint Pension Fund 77.59% NWQ Special Equity Institutional
PO Box 100 Portfolio Class Shares
Syracuse, NY 13205-0100
-----------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & CO INC 12.68% NWQ Special Equity Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104-4122
-----------------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co 79.98% 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 16.77% NWQ Special Equity Institutional
95 Broad cove Drive Portfolio Service Class
Montgomery, TX 77356-8311 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
December 15, 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. United Asset Management Corporation is a wholly-
owned subsidiary of Old Mutual plc, a United Kingdom based financial
services group.
27
<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 Company 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 the Fund's assets;
. Continuously reviews, supervises and administers the investment
program of the Fund; and
. Determines what portion of the Fund'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 Company, 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 Fund.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Fund'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
Company.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
28
<PAGE>
Advisory Fees
For its services, the Fund pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of the Fund.
Due to the effect of fee waivers by the adviser, the actual percentage of
average net assets that the Fund pay 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 Fund 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
2000
------------------------------------------------------------------------------------------------------------------------------
1999 $ 80,890 $104,737 $185,627
1998 $ 0 $ 72,915 $ 72,915
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for the Fund of the Company. The Company
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.
SERVICE AND DISTRIBUTION PLANS
--------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan
(the "Plans") for the Fund'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 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
29
<PAGE>
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 Fund 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.
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
===========================================================================
NWQ Special Equity Portfolio
2000
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
30
<PAGE>
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 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 the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of
its services under the Fund Administration Agreement. UAMFSI may, at its
own expense, 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 Company. UAMFSI will pay
such people for such employment. The Company will not incur any obligations
with respect to such people. Other expenses incurred in the operation of
the Company will be borne by the Company or other parties, including:
. Taxes, interest, brokerage fees and commissions.
31
<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 Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as
follows:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. A fee calculated from the aggregate net assets of the Fund at the
following rates:
Annual Rate
=================================================================
NWQ Special Equity Portfolio 0.043%
2. An annual fee to UAMFSI for sub-administration and other services,
which UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-
disbursing services, which UAMFSI pays to DST Systems, Inc. calculated
as follows:
32
<PAGE>
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Fund paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
==========================================================================================================
<S> <C> <C> <C>
NWQ Special Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------
1999 $16,236 $58,223 $74,459
1998 $ 6,063 $56,235 $62,298
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a
code of ethics under Rule 17j-1 of the 1940 Act that permits investment
personnel to purchase and sell securities for their personal account.
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 Fund. The Investment Agreement also directs the adviser
to use its best efforts to obtain the best execution with respect to all
transactions for the Fund. 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 Fund 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. Research services provided by brokers through which the Fund
effects securities transactions may be used by the portfolio's investment
adviser in servicing all of its accounts and not all of these services may
be used by the adviser in connection with the portfolio. Such research
include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs
and expenses), advice concerning the value of securities, the advisability
of investing in, purchasing or selling securities, the availability of
securities or the purchasers or sellers of securities, furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy and performance of accounts, effecting
securities transactions and performing functions incidental thereto (such
as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
33
<PAGE>
During the fiscal year ended October 31, 2000, the adviser directed $____
of the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers
or dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions
with dealers, the investment adviser may also consider the amount of
portfolio shares a broker-dealer has sold and the referral of other clients
by the broker to the adviser, subject to the requirements of best execution
described above. In addition, the portfolio may place trades with qualified
broker-dealers who recommend the portfolio or who act as agents in the
purchase of portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for the Fund 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 Fund, in a fair and
reasonable manner. Although there is no specified formula for allocating
such transactions, the Company'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 Fund 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 Fund execute
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 two fiscal years, the portfolios paid the following in
brokerage commissions:
Brokerage Commissions
===========================================================================
NWQ Special Equity Portfolio
2000
---------------------------------------------------------------------------
1999 $21,636
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed
its name to "The Regis Fund, Inc." On October 31, 1995, the Company changed
its name to "UAM Funds, Inc." The Fund's principal executive office is
located at 211 Congress Street, Boston,
34
<PAGE>
MA 02110; however, shareholders should direct all correspondence to the
address listed on the cover of this SAI. The Company is an diversified,
open-end management company. This means that with respect to 75% of its
total assets, the Fund may not invest more than 5% of its total assets in
the securities of any one issuer (other than U.S. Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the
Company 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 Company. 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 Company's governing board.
If the Company is liquidated, the shareholders of the Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or
in the case of a class, belonging to that Fund and allocable to that class.
The Company will distribute is net assets to its shareholders in proportion
to the number of shares of that Fund or class thereof held by them and
recorded on the books of the Company. The liquidation of any Fund or class
thereof may be authorized at any time by vote of a majority of the members
of the governing board.
The Company will not hold annual meetings except when required to by the
1940 Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder
servicing and the distribution of such shares pursuant to a
distribution plan or other 12b-1 plan;
. Institutional Service 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; and
. Advisor 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.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Fund 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.
Each Fund send account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
FEDERAL TAXES
The Fund intend 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 it generally will be relieved of federal
income and excise taxes. If the Fund were to fail to make sufficient
distributions in a year, it would be subject to corporate income taxes
and/or excise taxes. In addition, if the shortfall were large enough, the
Fund could be disqualified as a regulated investment company. If a Fund was
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. Moreover, if a Fund was to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income
taxes and/or excise taxes in respect of the shortfall or, if the shortfall
is large enough, the Fund could be disqualified as a regulated investment
company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year
period ending October 31 of such calendar year and 100% of any such amounts
that were not distributed in the prior year. The Fund intend to make
sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar
year to avoid liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year if such dividends are actually paid during January
of the following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Fund is equal to the
NAV of its Fund. The Fund calculates its NAV 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
Fund, plus cash and other assets plus income accrued but not yet
received.
36
<PAGE>
Each Fund 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 it calculates
its NAV on the following business day. Service Agents are responsible to
their customers and the Company 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 the Fund. The Company will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Company 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 Fund shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares
of Fund the with securities, instead of cash. If the Company 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 Company
will issue shares of the Fund at the NAV of the Fund determined as of the
same time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-
kind purchases if the transaction meets the following conditions:
37
<PAGE>
. The securities are eligible investments for the Fund;
. 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 Fund 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 Fund cannot exceed 5% of the net assets of
the Fund. 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 Fund investments.
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 Company 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 Company or UAMSSC may be liable for any losses due
to unauthorized or fraudulent telephone instructions if the Company or the
UAMSSC do not employ the procedures described above. Neither the Company 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 Fund 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 have 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 Company 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 Company will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Company will
pay your redemption proceeds earlier as applicable law so requires.
The Company 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
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or to fairly determine the value of its
assets; or
. for such other periods as the SEC may permit.
39
<PAGE>
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
Board 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 other mutual funds in
the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Fund 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 Fund measure 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 Fund calculate their 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 Fund 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).
40
<PAGE>
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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of
10 Years or Since
One Year Five Years Inception Inception Date
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Class 11/4/97
------------------------------------------------------------------------------------------------------------------
Institutional Service Class 11/7/97
</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
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.
41
<PAGE>
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 Fund's October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Fund's Annual Report is incorporated by
reference herein. Shareholders may get copies of the Fund's Annual Report
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 Fund.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of the
series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their Funds.
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.
UAMSCC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
42
<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 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.
43
<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:
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.
44
<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.
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.
45
<PAGE>
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.
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.
46
<PAGE>
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 modest
but may vary slightly from time
AA- 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 prudent investment. Considerable
BBB- variability in risk during economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet obligations when
due. Present or prospective
BB- 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.
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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.
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<PAGE>
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.
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.
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<PAGE>
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.
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
50
<PAGE>
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 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)
51
<PAGE>
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.
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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<PAGE>
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
53
<PAGE>
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.
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.
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<PAGE>
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 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 __, 2001
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the Funds dated
February __, 2001, as supplemented from time to time. You may obtain the
Funds' prospectus by contacting the UAM Funds at the address listed
above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Description of Permitted Investments........................................ 1
Borrowing.................................................................. 1
Debt Securities............................................................ 1
Derivatives................................................................ 7
Equity Securities.......................................................... 15
Foreign Securities......................................................... 17
Investment Companies....................................................... 20
Repurchase Agreements...................................................... 21
Restricted Securities...................................................... 21
Securities Lending......................................................... 21
Short Sales................................................................ 22
When Issued Transactions................................................... 23
Investment Policies of the Funds............................................ 23
Fundamental Policies....................................................... 23
Non-Fundamental Policies................................................... 24
Management of the Company................................................... 25
Board Members.............................................................. 25
Officers................................................................... 26
Principal Shareholders...................................................... 27
Investment Advisory and Other Services...................................... 27
Investment Adviser......................................................... 27
Distributor................................................................ 29
Shareholder Servicing Arrangements......................................... 30
Administrative Services.................................................... 30
Custodian.................................................................. 31
Independent Accountants.................................................... 31
CODE OF ETHICS............................................................. 32
Brokerage Allocation and Other Practices.................................... 32
Selection of Brokers....................................................... 32
Simultaneous Transactions.................................................. 32
Brokerage Commissions...................................................... 33
Capital Stock and Other Securities.......................................... 33
Purchase, Redemption and Pricing of Shares.................................. 35
Net Asset Value Per Share.................................................. 35
Purchase of Shares......................................................... 36
Redemption of Shares....................................................... 37
Exchange Privilege......................................................... 38
Transfer Of Shares......................................................... 38
Performance Calculations.................................................... 39
Total Return............................................................... 39
Yield...................................................................... 39
Comparisons................................................................ 40
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
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Funds' prospectus, the Funds may use a variety of
investment strategies in addition to its principal investment strategies. This
SAI describes each of these investments/strategies and their risks. The Funds
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. You can find more information
concerning the limits on the ability of the Funds to use these investments in
"Investment Policies of the Funds?"
BORROWING
--------------------------------------------------------------------------------
The Funds may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 331/3% of its total assets (including
the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss. To
mitigate the risks of leverage, the Fund will limit the amount it may borrow
to not more than 33 1/3% of its total assets, taken at market value. In
addition, the Funds will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
The Funds will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
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 "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.
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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 Funds.
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
considered the equivalent of treasury securities and are backed by the full
faith and credit of the U.S. government. 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 Fund shares. To buy GNMA securities, the Funds may have to pay a
premium over the maturity value of the underlying mortgages, which the Fund
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
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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. For example, payments of
interest and principal are more frequent (usually monthly) and their interest
rates are sometimes adjustable. In addition, 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 Funds 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.
The Funds 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.
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Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Funds 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 Funds 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
Funds 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 Funds 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 Funds 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
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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 Funds' 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 Funds may 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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Funds
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 Funds. If left unattended,
drifts in the average maturity of the Funds can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Funds.
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Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Funds' average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Funds 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." If 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 Funds 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 Funds 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 Fund 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 Funds are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise stated
in the Funds' prospectus, the Funds may use derivatives to gain exposure to
various markets in a cost efficient manner, to
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reduce transaction costs or to remain fully invested. The Funds may also
invest in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Funds 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 Funds
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 or custodian bank, 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 Funds may incur commission expenses when it opens or closes a futures
position.
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 Funds 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 Funds 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 Funds 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 Funds obtain the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The Funds would normally purchase call options in anticipation
of an increase in the market value of securities it owns or wants to buy. The
Funds 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 Funds 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 Funds 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 Funds
write 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 Funds 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 Funds 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 Funds 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 Funds would hope to profit by
closing out the put option at a lower price. If security prices fall, the
Funds 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 Funds 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 Funds 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 Funds would expect the option to expire and
the premium it received to offset the decline of the security's value.
However, the Funds 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 Funds are permitted only to write covered options. At the time of selling
the call option, the Funds may cover the option by owning:
. 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.
At the time of selling a put option, the Funds may cover the put option by:
. 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 Funds may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Funds 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 Funds 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 Funds 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 Funds 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 Funds
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 Funds.
Combined Positions
The Funds 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 Funds could
construct a
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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 Funds 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 Funds
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 Funds 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 Funds 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 Funds could also hedge the position by
selling another currency expected to perform similarly to the currency in
which the Funds' 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 Funds 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 Funds 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 Funds 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.
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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 Funds 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 Funds
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 Funds 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 Funds. If a swap agreement calls for payments by the Funds, the Funds
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 Funds 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 Funds 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 Funds' gains
or losses. In order to reduce the risk associated with leveraging, the Funds
may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Funds 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 Funds' accrued obligations under the swap agreement
over the accrued amount the Funds are 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 Funds'
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 Funds 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, the Funds could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the Funds enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Funds may have to pay more
money than it receives. Similarly, if the Funds enter
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into a swap where it agrees to exchange a fixed rate of interest for a
floating rate of interest, the Funds 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. The Funds 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 Funds than if it had not entered into any
derivatives transactions. Derivatives may magnify the Funds' 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
Funds holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Funds to greater risks.
Correlation of Prices
The Funds' 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 Funds are 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 Funds' prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Funds 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 Funds. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Funds against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Funds' 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 Funds' investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Funds can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Funds may close out a futures contract only on the exchange the
contract was initially traded. Although the Funds intend 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 Funds may not be able
to close out its position. In an illiquid market, the Funds 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
Funds may lose money by investing in derivatives. For example, if the Funds
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
Funds could be required to sell the security upon exercise at a price below
the current market price. Similarly, if the Funds 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 Funds 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, the Funds 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 Funds and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Funds may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Funds 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuer's
common stock at the Fund's option during a specified time period (such as
convertible preferred stocks, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer's capital structure, but is usually subordinated to
similar non-convertible securities. 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. In general, the market value of
a convertible security is at least the higher of its "investment value' (i.e.,
its value as a fixed income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock).
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. The price of a convertible security tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying common stock declines.
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A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. Government securities and (ii) call options or warrants
on the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has
similar investment characteristics, but may differ with respect to credit
quality, time to maturity, trading characteristics, and other factors. Because
the Fund will create synthetic convertible positions only out of high grade
fixed income securities, the credit rating associated with the Fund's
synthetic convertible investments is generally expected to be higher than that
of the average convertible security, many of which are rated below high grade.
However, because the options used to create synthetic convertible positions
will generally have expirations between one month and three years of the time
of purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset (in
the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences in
maturities, and the Adviser and applicable sub-adviser take such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Fund may extend the maturity by investing in a new option with longer maturity
on the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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.
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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;
. 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
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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;
. 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 Funds ability to invest in a particular country or make it
very expensive for the Funds to invest in that country. Some countries
require prior governmental
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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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as,
those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. 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.
19
<PAGE>
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the Funds to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the Funds receive from its investments. The Funds do 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 Funds also anticipates pricing, trading, settling
and valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the Funds expect 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 Funds 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 Funds. Like other shareholders, the Funds would
pay its proportionate share of those fees. Consequently, shareholders of the
Funds would pay not only the management fees of
20
<PAGE>
the Fund, but also the management fees of the investment company in which the
Fund invests. The Funds 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 Funds in the UAM Complex 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 Funds' investment policies and restrictions; and
. The Funds' adviser waives any fees it earns on the assets of the Fund that
is invested in the UAM DSI Money Market Portfolio.
The Funds 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 Funds normally use repurchase agreements to earn
income on assets that are not invested.
When the Funds enter 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 Funds' right to sell the
security may be restricted. In addition, the value of the security might
decline before the Funds can sell it and the Funds might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Funds may purchase restricted securities that are not registered for sale
to the general public. The Funds may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Funds' investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Funds
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Funds 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. If the Funds lend 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;
21
<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
Funds 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 Funds lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Funds 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Funds can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Funds replace the
borrowed security. Likewise, the Funds can profit if the price of the security
declines between those dates.
To borrow the security, the Funds also may be required to pay a premium, which
would increase the cost of the security sold. The Funds will incur transaction
costs in effecting short sales. The Funds' gains and losses will be decreased
or increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Funds may be required to pay in connection with a
short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, the Funds may engage in short sales "against the box." In a
short sale against the box, the Funds agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no extra
cost. The Funds will incur transaction costs to open, maintain and close short
sales against the box.
Restrictions on Short Sales
The Funds will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Funds net
assets.
22
<PAGE>
. The market value of the securities of any single issuer that have been sold
short by the Funds would exceed the two percent (2%) of the value of the
Funds' net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Funds sell a security short, its custodian segregates an amount
of cash or liquid securities equal to the difference between (a) the market
value of the securities sold short at the time they were sold short and (b)
any cash or U.S. Government securities the Funds are required to deposit with
the broker in connection with the short sale (not including the proceeds from
the short sale). The segregated assets are marked to market daily in an
attempt to ensure that the amount deposited in the segregated account plus the
amount deposited with the broker is at least equal to the market value of the
securities at the time they were sold short.
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 Funds contract 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 Funds have
committed to purchase before the securities are delivered, although the Funds
may earn income on securities it has in a segregated account. The Funds 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 Funds would use 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 Funds engage 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 Funds 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 Funds assume 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 Funds do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the Funds
The Funds 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 Funds 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 that the
Funds cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Funds will not:
. Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This
restriction does not, however, apply to any portfolio classified as a non-
diversified series of an open-end investment company under the 1940 Act.
. Borrow money, except to the extent permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in a Fund's prospectus and
statement of additional information as they may be amended from time to
time.
23
<PAGE>
. Issue senior securities, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest in,
securities of issuers that deal or invest in real estate and (3) that a Fund
may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Funds may
change them without shareholder approval. The Funds may:
. purchase and sell currencies or securities on a when-issued, delayed delivery
or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency and
foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of its
investable assets in securities of a single open-end management investment
company with substantially the same investment objectives, policies and
limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Funds intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities, including
(1) treating as illiquid securities that may not be disposed of in the
ordinary course of business within 7 days at approximately the value at which
the portfolio has valued the investment on its books; and (2) limiting its
holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other institutional
investors. These loans may not exceed 33 1/3% of the portfolio's total assets
taken at market value. In addition, a Fund must receive at least 100%
collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
24
<PAGE>
MANAGEMENT OF THE COMPANY
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events per
year.
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting
fee and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Funds in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr. English
has an investment advisory relationship with Investment Counselors of
Maryland, an investment adviser to one of the Funds in the UAM Funds Complex.
However, the Company does not believe that the relationship is a material
business relationship, and, therefore, does not consider him to be an
interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment
RR2 Box 700 Management Company, Inc. and Great Island
Center Harbor, NH 03226 Investment Company, Inc. (investment management).
1/26/29 From 1988 to 1993, Mr. Bennett was President of
Bennett Management Company. Mr. Bennett serves
on the Board of each Company in the UAM Funds
Complex.
----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World
1250 24th St., NW Wildlife Fund (nonprofit), since January 1999.
Washington, DC 20037 From 1991 to 1999, Ms. Dunn was Vice President
8/14/51 for Finance and Administration and Treasurer
of Radcliffe College (Education). Ms. Dunn
serves on the Board of each Company in the
UAM Funds Complex.
----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President
10401 N. Meridian St Administration, General Counsel and Secretary
Suite 400 of Lone Star Industries Inc. (cement and
Indianapolis, IN 46290 ready-mix concrete) since March 2000. From
4/21/42 June 1998 to March 2000 he was Executive
Vice President and Chief Administrative
Officer of Philip Services Corp. (ferrous
scrap processing, brokerage and industrial
outsourcing services). Mr. Humenuk was a
Partner in the Philadelphia office of the
law firm Dechert Price & Rhoads from July
1976 to June 1998. He was also formerly a
Director of Hofler Corp. (manufacturer of
gear grinding machines). Mr. Humenuk serves
on the Board of each Company in the UAM
Funds Complex.
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philip D. English Mr. English is President and Chief Executive
16 West Madison Street Officer of Broventure Company, Inc., a
Baltimore, MD 21201 company engaged in the investment management
8/5/48 business. He is also Chairman of the Board
of Chektec Corporation (Drugs) and Cyber
Scientific, Inc. (computer mouse company).
Mr. English serves on the Board of each
Company in the UAM Funds Complex.
---------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and
One International Place Director of UAM since May 2000; Chairman 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee
3/5/43 of Bates College and the Committee for
Economic Development; Chairman-elect of
the Board of Trustees of the Rockefeller
Foundation; Member of The Business Roundtable,
the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of
Public Health; Director of the Nashua
Corporation and the National Alliance of
Business.
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides
information regarding their present positions, date of birth, address and
their principal occupations during the past five years. The Company's
officers are paid by UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James F. Orr III* Board President, Chief Executive Officer and Director 0 0
One International Place Member of UAM since May 2000; Chairman and Chief
Boston, MA 02110 President Executive Officer of UNUM Corporation
3/5/43 (Insurance) from 1988 to 1999; Trustee of Bates
College and the Committee for Economic Development;
Chairman-elect of the Board of Trustees of
the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for
Society, and the Health Advisory Council at
the Harvard School of Public Health; Director
of the Nashua Corporation and the National
Alliance of Business.
---------------------------------------------------------------------------------------------------------------------------------
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of
7/31/65 UAMFSI (financial services) and UAMFDI
(broker-dealer) since April 2000; Senior Vice
President and Secretary of Signature Financial
Group, Inc. (financial services) and affiliated
broker-dealers from 1991 to 2000; Director and
Secretary of Signature Financial Group Europe,
Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual
Funds (mutual funds) from 1996 to 2000;
Secretary of the 59 Wall Street Family of
Mutual Funds (mutual funds) from 1996 to 2000.
---------------------------------------------------------------------------------------------------------------------------------
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
7/4/51 Fidelity Investments from November 1990 to
March 1995.
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
9211 Congress Street Secretary February 1998; Secretary and Compliance Officer
Boston, MA 02110 of UAMFDI (broker-dealer) since February 2000;
12/23/63 Assistant Vice President of Scudder Kemper
Investments (financial services) from May 1992
to February 1998.
----------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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 45.37% Rice Hall James Small Institutional Class
Reinvest Account Cap Portfolio Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
---------------------------------------------------------------------------------------------------------------------------------
Johnson Machinery Co. 9.84% Rice Hall James Institutional Class
Attn: Kevin Kelly Small/Mid Cap Shares
PO Box 351 Portfolio
Riverside, CA 92502-0351
---------------------------------------------------------------------------------------------------------------------------------
City National Bank 8.73% Rice Hall James Institutional Class
FBO Johnson Machinery PSP Small/Mid Cap Shares
A/C # 67347006
PO Box 60520
Los Angeles, CA 90060-0520
---------------------------------------------------------------------------------------------------------------------------------
California Lutheran University 8.68% Rice Hall James Institutional Class
60 W. Olsen Road # 1200 Small/Mid Cap Shares
Thousand Oaks, CA 91360-2787
---------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc. 12.61% Rice Hall James Institutional Class
FBO 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 December 15,
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
--------------------------------------------------------------------------------
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
27
<PAGE>
investment management services to individual and institutional investors since
1974. United Asset Management Corporation is a wholly-owned subsidiary of Old
Mutual plc, a United Kingdom based financial services group.
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
Chairman in 1974, 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
President and Chief in 1984. Prior to that time, he was Investment Officer, Security Analyst and Portfolio
Executive Officer Manager at California 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
Partner and Co-Director of 1986, Mr. Tessmer was Vice President and Senior Portfolio Manager at The Pacific Century
Research Group, San 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
Partner and Co-Director of 1983. Prior to that time, he was Senior Investment Analyst at Comerica Bank, Detroit,
Research Michigan. Mr. 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
Partner with the 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
Partner of 1998, 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 Company 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 the Funds' assets;
. Continuously reviews, supervises and administers the investment program of
the Funds; and
. Determines what portion of the Funds' assets will be invested in securities
and what portion will consist of cash.
28
<PAGE>
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 Company, 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 Funds.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Funds' 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
Company.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the Funds pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of each Fund.
Due to the effect of fee waivers by the adviser, the actual percentage of
average net assets that the Funds pay 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 Funds 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 Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $344,628 $ 0 $344,628
1998 $367,727 $ 0 $367,727
-------------------------------------------------------------------------------------------------------------------------------
Small/Mid Cap Portfolio
2000
-------------------------------------------------------------------------------------------------------------------------------
1999 $105,299 $71,187 $176,486
1998 $ 43,801 $ 57,343 $101,144
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for each Fund of the Company. The Company
offers its shares continuously. While UAMFDI will use its best efforts to
sell shares of the Funds, 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.
29
<PAGE>
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 Company or the Funds. 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 Funds.
ADMINISTRATIVE SERVICES
--------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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 Company. UAMFSI will pay such people for
such employment. The Company will not incur any obligations with respect to
such people. Other expenses incurred in the operation of the Company will be
borne by the Company 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 Funds.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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
30
<PAGE>
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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as follows:
. $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 Fund at the
following rates:
<TABLE>
<CAPTION>
Annual Rate
==========================================================================
<S> <C>
Small Cap Portfolio 0.043%
--------------------------------------------------------------------------
Small/Mid Cap Portfolio 0.043%
</TABLE>
2. An annual fee to UAMFSI for sub-administration and other services, which
UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Funds paid the following in administration
and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
======================================================================================================
<S> <C> <C> <C>
Small Cap Portfolio
2000
------------------------------------------------------------------------------------------------------
1999 $27,603 $70,286 $ 97,889
1998 $22,712 $80,210 $102,922
------------------------------------------------------------------------------------------------------
Small/Mid Cap Portfolio
2000
------------------------------------------------------------------------------------------------------
1999 $17,445 $60,849 $78,294
1998 $10,762 $70,275 $81,037
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
31
<PAGE>
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a
code of ethics under Rule 17j-1 of the 1940 Act that permits investment
personnel to purchase and sell securities for their personal account.
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 Funds. The Investment Agreement also directs the adviser
to use its best efforts to obtain the best execution with respect to all
transactions for the Funds. 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 Funds 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. Research services provided by brokers through which the Fund
effects securities transactions may be used by the portfolio's investment
adviser in servicing all of its accounts and not all of these services may
be used by the adviser in connection with the portfolio. Such research
include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs
and expenses), advice concerning the value of securities, the advisability
of investing in, purchasing or selling securities, the availability of
securities or the purchasers or sellers of securities, furnishing analyses
and reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy and performance of accounts, effecting
securities transactions and performing functions incidental thereto (such
as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____
of the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers
or dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions
with dealers, the investment adviser may also consider the amount of
portfolio shares a broker-dealer has sold and the referral of other clients
by the broker to the adviser, subject to the requirements of best execution
described above. In addition, the portfolio may place trades with qualified
broker-dealers who recommend the portfolio or who act as agents in the
purchase of portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for each Fund 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 Funds, in a fair and
reasonable manner. Although there is no specified formula for allocating
such transactions, the Company'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 Funds 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 Funds execute
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 two fiscal years, the portfolios paid the following in
brokerage commissions:
Brokerage Commissions
====================================================================
Small Cap Portfolio
2000
--------------------------------------------------------------------
1999 $582,604
--------------------------------------------------------------------
Small/Mid Cap Portfolio
2000
--------------------------------------------------------------------
1999 $103,300
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed
its name to "The Regis Fund, Inc." On October 31, 1995, the Company 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 Company is an diversified, open-end management company. This means
that with respect to 75% of its total assets, the Funds may not invest more
than 5% of its total assets in the securities of any one issuer (other than
U.S. Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the
Company 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
33
<PAGE>
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 Company. 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 Company's governing board.
If the Company is liquidated, the shareholders of each Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or
in the case of a class, belonging to that Fund and allocable to that class.
The Company will distribute is net assets to its shareholders in proportion
to the number of shares of that Fund or class thereof held by them and
recorded on the books of the Company. The liquidation of any Fund or class
thereof may be authorized at any time by vote of a majority of the members
of the governing board.
The Company will not hold annual meetings except when required to by the
1940 Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing
and the distribution of such shares pursuant to a distribution plan or
other 12b-1 plan;
. Institutional Service 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; and
. Advisor 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.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Funds at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the Funds at
least three days before the record date for income dividend or capital gain
distribution.
Each Fund send account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
34
<PAGE>
FEDERAL TAXES
The Funds intend 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 it generally will be relieved of federal
income and excise taxes. If the Fund were to fail to make sufficient
distributions in a year, it would be subject to corporate income taxes
and/or excise taxes. In addition, if the shortfall were large enough, the
Funds could be disqualified as a regulated investment company. If a Fund
was 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. Moreover, if a Fund was to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income
taxes and/or excise taxes in respect of the shortfall or, if the shortfall
is large enough, the Fund could be disqualified as a regulated investment
company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year
period ending October 31 of such calendar year and 100% of any such amounts
that were not distributed in the prior year. The Funds intend to make
sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar
year to avoid liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year if such dividends are actually paid during January
of the following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Funds is equal to
the NAV of its Fund. The Fund calculates its NAV 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
Fund, plus cash and other assets plus income accrued but not yet
received.
Each Fund 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
35
<PAGE>
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
Funds must receive proper payment for the order by the time it calculates
its NAV on the following business day. Service Agents are responsible to
their customers and the Company 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 the Funds. The Company will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Company 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 Funds' shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares
of Funds the with securities, instead of cash. If the Company 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 Company
will issue shares of the Funds at the NAV of the Fund determined as of the
same time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-
kind purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Funds;
. 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 Funds and are delivered to
the Funds 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 Funds cannot exceed 5% of the
net assets of the Funds. 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.
36
<PAGE>
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 Funds' investments.
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 Company 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 Company or UAMSSC may be
liable for any losses due to unauthorized or fraudulent telephone
instructions if the Company or the UAMSSC do not employ the procedures
described above. Neither the Company 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 Funds to make payment wholly or
partly in cash, the Funds may pay redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by the Funds 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 Funds have 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 Funds 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 Funds.
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 Company 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 Company will pay for all shares redeemed under proper
procedures within seven days after it received your request. However, the
Company will pay your redemption proceeds earlier as applicable law so
requires.
The Company 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 SEC as a result of which it is not reasonably practicable for the
Fund to dispose of securities owned by it, or to fairly determine the
value of its assets; or
. for such other periods as the SEC may permit.
EXCHANGE PRIVILEGE
-------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible
for the authenticity of the exchange instructions received by telephone.
The Board 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 other
mutual funds in the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
-------------------------------------------------------------------------------
Shareholders may transfer shares of the Funds to another person by making a
written request to the Funds. 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 Funds measure 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 Funds calculate their
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 Funds 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 Funds 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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of
10 Years or
One Year Five Years Since Inception Inception Date
========================================================================================================
<S> <C> <C> <C> <C>
Small Cap Portfolio 7/1/94
--------------------------------------------------------------------------------------------------------
Small/Mid Cap Portfolio 11/1/96
</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:
39
<PAGE>
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 Funds' October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Funds' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the Funds'
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 Funds.
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.
40
<PAGE>
Adviser means the investment adviser of the Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of
the series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their Funds.
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.
41
<PAGE>
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.
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.
42
<PAGE>
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.
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:
43
<PAGE>
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.
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.
44
<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.
45
<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.
46
<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.
47
<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)
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.
48
<PAGE>
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.
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.
49
<PAGE>
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)
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.
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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.
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.
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<PAGE>
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.
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:
---------------------------------
52
<PAGE>
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.
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.
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<PAGE>
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.
54
<PAGE>
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 __, 2001
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the Funds dated
February __, 2001, as supplemented from time to time. You may obtain the
Funds' prospectus by contacting the UAM Funds at the address listed above.
<PAGE>
<TABLE>
<CAPTION>
Table Of Contents
<S> <C>
Description of Permitted Investments........................................................ 1
Borrowing.................................................................................. 1
Debt Securities............................................................................ 1
Derivatives................................................................................ 7
Equity Securities.......................................................................... 14
Foreign Securities......................................................................... 16
Investment Companies....................................................................... 19
Repurchase Agreements...................................................................... 20
Restricted Securities...................................................................... 20
Securities Lending......................................................................... 20
Short Sales................................................................................ 21
When Issued Transactions................................................................... 22
Investment Policies of the FUNDS............................................................ 22
Fundamental Policies....................................................................... 22
Non-Fundamental Policies................................................................... 23
Management of the Company................................................................... 23
Board Members.............................................................................. 24
Officers................................................................................... 25
Principal Shareholders...................................................................... 25
Investment Advisory and Other Services...................................................... 28
Investment Adviser......................................................................... 28
Distributor................................................................................ 31
Shareholder Servicing Arrangements......................................................... 31
Service And Distribution Plans............................................................. 31
Administrative Services.................................................................... 33
Custodian.................................................................................. 35
Independent Accountants.................................................................... 35
CODE OF ETHICS............................................................................. 35
Brokerage Allocation and Other Practices.................................................... 35
Selection of Brokers....................................................................... 35
Simultaneous Transactions.................................................................. 36
Brokerage Commissions...................................................................... 36
Capital Stock and Other Securities.......................................................... 37
Purchase, Redemption and Pricing of Shares.................................................. 39
Net Asset Value Per Share.................................................................. 39
Purchase of Shares......................................................................... 39
Redemption of Shares....................................................................... 40
Exchange Privilege......................................................................... 42
Transfer Of Shares......................................................................... 42
Performance Calculations.................................................................... 42
Total Return............................................................................... 42
Yield...................................................................................... 43
Comparisons................................................................................ 43
Financial Statements........................................................................ 44
Glossary.................................................................................... 44
Bond Ratings................................................................................ 45
Moody's Investors Service, Inc............................................................. 45
Standard & Poor's Ratings Services......................................................... 47
Duff & Phelps Credit Rating Co............................................................. 49
Fitch IBCA Ratings......................................................................... 50
Comparative Benchmarks...................................................................... 52
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Funds' prospectus, the Funds may use a variety of
investment strategies in addition to its principal investment strategies. This
SAI describes each of these investments/strategies and their risks. The Funds
may not notify shareholders before employing new strategies, unless it expects
such strategies to become principal strategies. You can find more information
concerning the limits on the ability of the Funds to use these investments in
"Investment Policies of the Funds?"
BORROWING
________________________________________________________________________________
The Funds may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 331/3% of its total assets (including
the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss. To
mitigate the risks of leverage, the Fund will limit the amount it may borrow
to not more than 33 1/3% of its total assets, taken at market value. In
addition, the Funds will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
The Funds will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
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 "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 the Funds.
1
<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
considered the equivalent of treasury securities and are backed by the full
faith and credit of the U.S. government. 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 Fund shares. To buy GNMA securities, the Funds may have to pay a
premium over the maturity value of the underlying mortgages, which the Fund
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
2
<PAGE>
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. For example, payments of
interest and principal are more frequent (usually monthly) and their interest
rates are sometimes adjustable. In addition, 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 Funds 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.
The Funds 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 monthly and have a
more focused range of principal payment dates than pass-through securities.
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.
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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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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
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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 Funds' 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 Funds may 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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average
of the effective or anticipated maturity of each debt security held by the
mutual fund, with the maturity of each security weighted by the percentage
of the assets of the mutual fund 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 --
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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 Funds 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 Funds. If
left unattended, drifts in the average maturity of the Funds can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
Funds.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Funds' average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Funds 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." If 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.
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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 Funds 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 Funds 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 Fund 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 Funds are not obligated to dispose of
securities whose issuers subsequently are in default or which are
downgraded below the above-stated ratings. The Fund may invest in
securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise
stated in the Funds' prospectus, the Funds may use derivatives to gain
exposure to various markets in a cost efficient manner, to reduce
transaction costs or to remain fully invested. The Funds may also invest in
derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Funds 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 Funds 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 or custodian bank, when they enter into the
contract. Initial margin
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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 Funds may incur commission expenses when it opens or closes a futures
position.
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 Funds 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 Funds 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 Funds 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 Funds obtain the
right to purchase, rather than sell, the underlying instrument at the
option's strike price. The Funds would normally purchase call options in
anticipation of an increase in the market value of securities it owns or
wants to buy. The Funds 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
Funds 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 Funds 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 Funds write 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 Funds 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 Funds 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 Funds 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 Funds would hope to profit
by closing out the put option at a lower price. If security prices fall,
the Funds 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 Funds 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 Funds 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 Funds would expect the option to
expire and the premium it received to offset the decline of the security's
value. However, the Funds 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 Funds are permitted only to write covered options. At the time of
selling the call option, the Funds may cover the option by owning:
. 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.
At the time of selling a put option, the Funds may cover the put option by:
. 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 Funds may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds.
Combined Positions
The Funds 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 Funds
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
Funds 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
Funds 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
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amount of U.S. dollars "locks in" the U.S. dollar price of the security.
The Funds 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 Funds 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 Funds could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the Funds' 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds. If a swap agreement calls for payments by the Funds,
the Funds 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 Funds 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 Funds may not be able to recover the
money it expected to receive under the contract.
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A swap agreement can be a form of leverage, which can magnify a Funds'
gains or losses. In order to reduce the risk associated with leveraging,
the Funds may cover its current obligations under swap agreements according
to guidelines established by the SEC. If the Funds 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 Funds' accrued obligations under
the swap agreement over the accrued amount the Funds are 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 Funds' 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 Funds 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, the Funds could lose
money by investing in an interest rate swap if interest rates change
adversely. For example, if the Funds enter into a swap where it agrees to
exchange a floating rate of interest for a fixed rate of interest, the
Funds may have to pay more money than it receives. Similarly, if the Funds
enter into a swap where it agrees to exchange a fixed rate of interest for
a floating rate of interest, the Funds 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. The
Funds 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 Funds than
if it had not entered into any derivatives transactions. Derivatives may
magnify the Funds' 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 Funds holds or intends to acquire should offset any losses incurred
with a derivative. Purchasing derivatives for purposes other than hedging
could expose the Funds to greater risks.
Correlation of Prices
The Funds' 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 Funds are hedging may not
move in the same amount, or even in the same direction as the hedging
instrument. The
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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 Funds' prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Funds
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 Funds. A currency hedge, for example, should protect
a yen-denominated security from a decline in the yen, but will not protect
the Funds against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the Funds' 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 Funds' investments precisely over
time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Funds can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Funds may close out a futures contract only on the exchange
the contract was initially traded. Although the Funds intend 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 Funds may
not be able to close out its position. In an illiquid market, the Funds
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
Funds may lose money by investing in derivatives. For example, if the Funds
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
Funds could be required to sell the security upon exercise at a price below
the current market price. Similarly, if the Funds 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 Funds 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, the Funds 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 Funds and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Funds may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Funds 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuer's
common stock at the Fund's option during a specified time period (such as
convertible preferred stocks, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer's capital structure, but is usually subordinated to
similar non-convertible securities. 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. In general, the market value of
a convertible security is at least the higher of its "investment value' (i.e.,
its value as a fixed income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock).
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. The price of a convertible security tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. Government securities and (ii) call options or warrants
on the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has
similar investment characteristics, but may differ with respect to credit
quality, time to maturity, trading characteristics, and other factors. Because
the Fund will create synthetic convertible positions only out of high grade
fixed income securities, the credit rating associated with the Fund's
synthetic convertible investments is generally expected to be higher than that
of the average convertible security, many of which are rated below high grade.
However, because the options used to create synthetic convertible positions
will generally have expirations between one month and three years of the time
of purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset (in
the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences in
maturities, and the Adviser and applicable sub-adviser take such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Fund may extend the maturity by investing in a new option with longer maturity
on the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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; 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.
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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;
. 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
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in its securities markets. These restrictions could limit the Funds ability
to invest in a particular country or make it very expensive for the Funds
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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as,
those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. 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.
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Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the Funds to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the Funds receive from its investments. The Funds do 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 Funds also anticipates pricing, trading, settling
and valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the Funds expect 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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The Funds 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 Funds. Like other shareholders, the Funds would
pay its proportionate share of those fees. Consequently, shareholders of the
Funds would pay not only the management fees of the Fund, but also the
management fees of the investment company in which the Fund invests. The
Funds 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 Funds in the UAM Complex 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 Funds' investment policies and restrictions; and
. The Funds' adviser waives any fees it earns on the assets of the Fund that
is invested in the UAM DSI Money Market Portfolio.
The Funds 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 Funds normally use repurchase agreements to earn
income on assets that are not invested.
When the Funds enter 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 Funds' right to sell the
security may be restricted. In addition, the value of the security might
decline before the Funds can sell it and the Funds might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Funds may purchase restricted securities that are not registered for sale
to the general public. The Funds may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Funds' investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Funds
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
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The Funds 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. If the Funds lend 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
Funds investing any cash collateral in interest bearing short-term
investments); and
20
<PAGE>
. It must determine that the borrower is an acceptable credit risk.
These risks are similar to the ones involved with repurchase agreements. When
the Funds lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Funds 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Funds can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Funds replace the
borrowed security. Likewise, the Funds can profit if the price of the security
declines between those dates.
To borrow the security, the Funds also may be required to pay a premium, which
would increase the cost of the security sold. The Funds will incur transaction
costs in effecting short sales. The Funds' gains and losses will be decreased
or increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Funds may be required to pay in connection with a
short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, the Funds may engage in short sales "against the box." In a
short sale against the box, the Funds agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no extra
cost. The Funds will incur transaction costs to open, maintain and close short
sales against the box.
Restrictions on Short Sales
The Funds will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Funds net
assets.
. The market value of the securities of any single issuer that have been sold
short by the Funds would exceed the two percent (2%) of the value of the
Funds' net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Funds sell a security short, its custodian segregates an amount
of cash or liquid securities equal to the difference between (a) the market
value of the securities sold short at the time they were sold short and (b)
any cash or U.S. Government securities the Funds are required to deposit with
the broker in connection with the short sale (not including the proceeds from
the short sale). The segregated assets are marked to market daily in an
attempt to ensure that the amount deposited in the segregated
21
<PAGE>
account plus the amount deposited with the broker is at least equal to the
market value of the securities at the time they were sold short.
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 Funds contract 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 Funds have committed to purchase before the securities are
delivered, although the Funds may earn income on securities it has in a
segregated account. The Funds 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 Funds would use 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 Funds engage 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 Funds 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 Funds assume 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 Funds do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the FUNDS
The Funds 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
Funds 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 that the
Funds cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Funds will not:
. Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This restriction
does not, however, apply to any portfolio classified as a non-diversified
series of an open-end investment company under the 1940 Act.
. Borrow money, except to the extent permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in a Fund's prospectus and
statement of additional information as they may be amended from time to time.
. Issue senior securities, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest in,
securities of issuers that deal or invest in real estate and (3) that a Fund
may purchase securities secured by real estate or interests therein.
22
<PAGE>
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Funds may
change them without shareholder approval. The Funds may:
. purchase and sell currencies or securities on a when-issued, delayed delivery
or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency and
foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of its
investable assets in securities of a single open-end management investment
company with substantially the same investment objectives, policies and
limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Funds intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities, including
(1) treating as illiquid securities that may not be disposed of in the
ordinary course of business within 7 days at approximately the value at which
the portfolio has valued the investment on its books; and (2) limiting its
holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other institutional
investors. These loans may not exceed 33 1/3% of the portfolio's total assets
taken at market value. In addition, a Fund must receive at least 100%
collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events per
year.
23
<PAGE>
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting
fee and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Funds in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr. English
has an investment advisory relationship with Investment Counselors of
Maryland, an investment adviser to one of the Funds in the UAM Funds Complex.
However, the Company does not believe that the relationship is a material
business relationship, and, therefore, does not consider him to be an
interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From Uam Funds
Name, Address, Date Of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
-----------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management Company,
RR2 Box 700 Inc. and Great Island Investment Company, Inc. (investment
Center Harbor, NH 03226 management). From 1988 to 1993, Mr. Bennett was President of
1/26/29 Bennett Management Company. Mr. Bennett serves on the Board of
each Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn was
Washington, DC 20037 Vice President for Finance and Administration and Treasurer of
8/14/51 Radcliffe College (Education). Ms. Dunn serves on the Board of
each Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June 1998
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law firm
Dechert Price & Rhoads from July 1976 to June 1998. He was also
formerly a Director of Hofler Corp. (manufacturer of gear
grinding machines). Mr. Humenuk serves on the Board of each
Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the investment
Baltimore, MD 21201 management business. He is also Chairman of the Board of Chektec
8/5/48 Corporation (Drugs) and Cyber Scientific, Inc. (computer mouse
company). Mr. English serves on the Board of each Company in the
UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since May
One International Place 2000; Chairman and Chief Executive Officer of UNUM Corporation 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee of Bates College and the
3/5/43 Committee for Economic Development; Chairman-elect of the Board
of Trustees of the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of Public Health; Director
of the Nashua Corporation and the National Alliance of Business.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides information
regarding their present positions, date of birth, address and their principal
occupations during the past five years. The Company's officers are paid by
UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with The Fund As Of The Fund Complex As
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 Of October 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
James F. Orr III* Board Member President, Chief Executive Officer and Director of 0 0
One International Place President UAM since May 2000; Chairman and Chief Executive
Boston, MA 02110 Officer of UNUM Corporation (Insurance) from 1988 to
3/5/43 1999; Trustee of Bates College and the Committee for
Economic Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for Society,
and the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua Corporation
and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer) since
April 2000; Senior Vice President and Secretary of
Signature Financial Group, Inc. (financial services)
and affiliated broker-dealers from 1991 to 2000;
Director and Secretary of Signature Financial Group
Europe, Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000; Secretary of the 59
Wall Street Family of Mutual Funds (mutual funds)
from 1996 to 2000.
-----------------------------------------------------------------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------------------------------------------------------------
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer of
Boston, MA 02110 UAMFDI (broker-dealer) since February 2000; Assistant
12/23/63 Vice President of Scudder Kemper Investments
(financial services) from May 1992 to February 1998.
-----------------------------------------------------------------------------------------------------------------------------------
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 December 15, 2000, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
25
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UMBSC & CO. 21.41% Sirach Bond Institutional
FBO Interstate Brands Portfolio Class Shares
Conservative Growth
PO Box 419260
Kansas City, MO 64141-6260
------------------------------------------------------------------------------------------------------------------------
Charles Schwab & CO INC. 9.96% Sirach Bond Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94101-4122
------------------------------------------------------------------------------------------------------------------------
Wendel & Co. 8.18% Sirach Bond Institutional
FBO AAA Portfolio Class Shares
PO Box 1006
New York, NY 10286
------------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 5.98% Sirach Bond Institutional
FBO Interstate Brands Portfolio Class Shares
Moderate Growth
PO Box 419260
Kansas City, MO 64141-6260
------------------------------------------------------------------------------------------------------------------------
UMBSC & CO 7.70% Sirach Bond Institutional
FBO IBC Savings Invest-Cons-GR Portfolio Class Shares
PO Box 64141-6692
------------------------------------------------------------------------------------------------------------------------
Gregory Thorton & John Flinn TR 6.83% Sirach Bond Institutional
U/A Boston Newspaper Retirement FD Portfolio Class Shares
C/O Alicare Inc.
56 Roland Street
Boston, MA 02129-1235
------------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 14.70% Sirach Equity Institutional
FBO Interstate Brands Portfolio Class Shares
Aggressive Growth
PO Box 419175
Kansas City, MO 64141-6175
------------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 6.78% Sirach Equity Institutional
FBO Interstate Brands Portfolio Class Shares
Conservative Growth
PO Box 419175
Kansas City, MO 64141-6175
------------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 6.66% Sirach Equity Institutional
FBO Interstate Brands Portfolio Class Shares
Moderate Growth
PO Box 419175
Kansas City, MO 64141-6175
------------------------------------------------------------------------------------------------------------------------
Lutsey Family Foundation, Inc. 8.46% Sirach Equity Institutional
PO Box 22074 Portfolio Class Shares
Green Bay, WI 54305-2074
------------------------------------------------------------------------------------------------------------------------
Key Trust Company - PRISM 6.91% Sirach Equity Institutional
Lane Powell, LLP PSP Portfolio Class Shares
4900 Tiedeman Road
Brooklyn, OH 44144-2338
------------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 6.66% Sirach Equity Institutional
FBO Interstate Brands Portfolio Class Shares
Moderate Growth
P.O. Box 419175
Kansas City, MO 64141-6175
------------------------------------------------------------------------------------------------------------------------
SO Alaska Defined 26.78% Sirach Growth Institutional
Contribution Pension Plan Portfolio Class Shares
Attn: Carol Patton
PO Box 241266
Anchorage, AK 99524-1266
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned Portfolio Class
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NFSC FEBO 22.67% Sirach Growth Institutional
First Interstate Bank Financial Svcs. D Portfolio Class Shares
Cash Account
PO Box 30918
Billings, MT 59116-0918
-------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co. TR 10.28% 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 6.00% Sirach Growth Institutional
Connor Development CO Portfolio Class Shares
Profit Sharing Plan
846 108th Ave NW
Bellevue, WA 98004-4304
-------------------------------------------------------------------------------------------------------------------------
Wilmington Trust Co. TR 6.75% Sirach Growth Institutional
FBO Cherokee Nation 401K Plan Portfolio Class Shares
c/o Mutual Funds UAM
PO Box 8971
Wilmington, DE 19899-8971
-------------------------------------------------------------------------------------------------------------------------
Bank of New York CUST 16.96% Sirach Special Institutional
Two Union Square Equity Portfolio Class Shares
Automotive Machinists
601 Union Street, Suite 520
Seattle, WA 98101-2328
-------------------------------------------------------------------------------------------------------------------------
Wells Fargo Minnesota NA CUST 5.99% Sirach Special Institutional
FBO Hanford Oper. & Engineering Equity Portfolio Class Shares
PO Box 1533
Minneapolis, MN 55480-1533
-------------------------------------------------------------------------------------------------------------------------
Northern Trust Company CUST 6.50% Sirach Special Institutional
FBO Navajo Nation 367 Equity Portfolio Class Shares
PO Box 92956
Chicago, IL 60675-2956
-------------------------------------------------------------------------------------------------------------------------
Dingle & CO 5.20% Sirach Special Institutional
c/o Comerica Bank Mutual Funds Equity Portfolio Class Shares
Operating Engineers 324 Pen FD 246
PO Box 75000
Detroit, MI 48275-0001
-------------------------------------------------------------------------------------------------------------------------
South Bay Hotel Employee & Restaurant EE Pension 14.69% Sirach Strategic Institutional
Plan Balanced Portfolio Class Shares
c/o United Admin Services
PO Box 5057
San Jose, CA 95150-5057
-------------------------------------------------------------------------------------------------------------------------
Alaska Bricklayers Retirement Plan 13.38% Sirach Strategic Institutional
407 Denali Street Balanced Portfolio Class Shares
Anchorage, AK 99501-2615
-------------------------------------------------------------------------------------------------------------------------
SO Alaska Defined 8.32% Sirach Strategic Institutional
Contribution Pension Plan Balanced Portfolio Class Shares
P.O. Box 241266
Anchorage, AK 99524-1266
-------------------------------------------------------------------------------------------------------------------------
Wells Fargo Bank Minnesota, NA 10.71% Sirach Strategic Institutional
FBO Agrium US Retirement Plan Balanced Portfolio Class Shares
Attn: Carol Patton
PO Box 1533
Minneapolis, MN 55480-1533
-------------------------------------------------------------------------------------------------------------------------
Wendell & Co. 5.19% Sirach Strategic Institutional
FBO San Diego Butchers Balanced Portfolio Class Shares
Wall Street Station
PO Box 1066
New York, NY 10268-1066
</TABLE>
27
<PAGE>
Name and Address of Percentage of
Shareholder Shares Owned Portfolio Class
------------------------------------------------------------------------------
NANA Regional Corporation Inc. 5.76% Sirach Strategic Institutional
Employees Pension Plan Balanced Class Shares
Attn: J Shelby Stanstny Portfolio
1344 K Street
Anchorage, AK 99501-1066
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 December 15,
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 520 Pike Tower,
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.
United Asset Management Corporation is a wholly-owned subsidiary of Old Mutual
plc, a United Kingdom based financial services group.
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 Funds. 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.
Name & Title Experience
==============================================================================
Harvey G. Bateman Mr. Bateman joined the adviser in 1988 as a
Principal/Portfolio Principal/Portfolio Manager, where he has managed equity
Manager accounts since 1989.
------------------------------------------------------------------------------
Sharon Rowley, CFA Ms. Rowley joined the adviser in 1998 as a
Principal/Portfolio Principal/Port/folio Manager. Before that she was a
Manager Principal at Seafirst Investment Counselors where she
managed equity, bond and balanced accounts for high net
worth individuals and institutional clients.
28
<PAGE>
Name & Title Experience
==============================================================================
Karin L. Gibony Ms. Gibony joined the adviser in 1990. She has managed
Principal/Portfolio equity and balanced funds for Sirach Capital Management
Manager since 1991.
------------------------------------------------------------------------------
James P. Kieburtz Mr. Kieburtz joined the adviser in 1994. Before that,
Principal/Portfolio he was a Systems Engineer specializing in financial
Manager 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 Management Team above.
Manager
------------------------------------------------------------------------------
James P. Kieburtz You may find Mr. Kieburtz's biography under Equity
Principal/Portfolio Management Team above.
Manager
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/
Principal/Portfolio Portfolio Manager when Olympic Capital Management
Manager 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/
Principal/Portfolio Portfolio Manager when Olympic Capital Management
Manager 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/
Principal/Portfolio Portfolio Manager. Before that, he was a Senior
Manager 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/
Principal/Portfolio Portfolio Manager. Before that, he was a Senior Analyst
Manager 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.
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Company has filed each agreement with the SEC as
part of its registration statement on Form N-1A.
29
<PAGE>
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the Funds' assets;
. Continuously reviews, supervises and administers the investment program of
the Funds; and
. Determines what portion of the Funds' 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 Company, 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 Funds.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Funds' 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
Company.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the Funds pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of each Fund.
Due to the effect of fee waivers by the adviser, the actual percentage of
average net assets that the Funds pay 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 Funds paid the following in management fees to the adviser:
Investment Advisory Investment Advisory Total Investment
Fees Paid Fees Waived Advisory Fees
----------------------------------------------------------------------------
Growth Portfolio
2000
---------------------------------------------------------------------------
1999 $ 571,110 $0 $ 571,110
---------------------------------------------------------------------------
1998 $ 942,815 $0 $ 942,815
---------------------------------------------------------------------------
Equity Portfolio
2000
---------------------------------------------------------------------------
1999 $ 294,707 $ 155,576 $ 139,131
---------------------------------------------------------------------------
1998 $ 129,597 $ 105,815 $ 23,782
---------------------------------------------------------------------------
Special Equity
Portfolio
2000
---------------------------------------------------------------------------
1999 $1,177,517 $0 $1,177,517
---------------------------------------------------------------------------
1998 $1,849,841 $0 $1,849,841
---------------------------------------------------------------------------
30
<PAGE>
Strategic Balanced
Portfolio
2000
--------------------------------------------------------------------------
1999 $ 508,834 $0 $ 508,834
--------------------------------------------------------------------------
1998 $ 560,700 $0 $ 560,700
--------------------------------------------------------------------------
Bond Portfolio
2000
--------------------------------------------------------------------------
1999 $0 $243,816 $ 243,816
--------------------------------------------------------------------------
1998 $0 $182,632 $ 186,632
--------------------------------------------------------------------------
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for each Fund of the Company. The Company
offers its shares continuously. While UAMFDI will use its best efforts to
sell shares of the Funds, 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 Company or the Funds. 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 Funds.
SERVICE AND DISTRIBUTION PLANS
--------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan (the
"Plans") for the Funds' 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.
31
<PAGE>
. 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 Fund 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.
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
-----------------------------------------------------------------------------
Growth Portfolio
2000
-----------------------------------------------------------------------------
Bond Portfolio
2000
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.
32
<PAGE>
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 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 the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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 Company. UAMFSI will pay such people for
such employment. The Company will not incur any obligations with respect to
such people. Other expenses incurred in the operation of the Company will be
borne by the Company or other parties, including:
. Taxes, interest, brokerage fees and commissions.
33
<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 Funds.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as
follows:
. $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 Fund at the
following rates:
Annual Rate
==============================================================
Growth Portfolio 0.043%
--------------------------------------------------------------
Equity Portfolio 0.043%
--------------------------------------------------------------
Special Equity Portfolio 0.043%
--------------------------------------------------------------
Strategic Balanced Portfolio 0.063%
--------------------------------------------------------------
Bond Portfolio 0.043%
2. An annual fee to UAMFSI for sub-administration and other services,
which UAMFSI pays to SEI, calculated as follows:
. 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.
34
<PAGE>
3. An annual base fee to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class. For the last three fiscal years the
Funds paid the following in administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $ 47,716 $ 94,417 $142,133
---------------------------------------------------------------------------------------------------------------
1998 $199,766 $137,236 $337,002
---------------------------------------------------------------------------------------------------------------
Equity Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $ 27,368 $ 69,855 $ 97,223
---------------------------------------------------------------------------------------------------------------
1998 $ 93,669 $ 76,332 $170,001
---------------------------------------------------------------------------------------------------------------
Special Equity Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $ 81,073 $123,173 $204,246
---------------------------------------------------------------------------------------------------------------
1998 $358,557 $245,389 $603,946
---------------------------------------------------------------------------------------------------------------
Strategic Balanced Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $ 58,484 $ 84,804 $143,288
---------------------------------------------------------------------------------------------------------------
1998 $162,819 $107,247 $270,066
---------------------------------------------------------------------------------------------------------------
Bond Portfolio
2000
---------------------------------------------------------------------------------------------------------------
1999 $ 39,507 $ 74,467 $113,974
---------------------------------------------------------------------------------------------------------------
1998 $ 86,660 $ 63,143 $149,803
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a code
of ethics under Rule 17j-1 of the 1940 Act that permits investment personnel
to purchase and sell securities for their personal account.
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 Funds. The Investment Agreement also directs the adviser to use its
best efforts to obtain the best execution with respect to all transactions for
the Funds. 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 Funds 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
35
<PAGE>
the research, statistical, and pricing services provided by the broker
effecting the transaction. Research services provided by brokers through which
the Fund effects securities transactions may be used by the portfolio's
investment adviser in servicing all of its accounts and not all of these
services may be used by the adviser in connection with the portfolio. Such
research include research reports on particular industries and companies,
economic surveys and analyses, recommendations as to specific securities and
other products or services (e.g., quotation equipment and computer related
costs and expenses), advice concerning the value of securities, the
advisability of investing in, purchasing or selling securities, the
availability of securities or the purchasers or sellers of securities,
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts,
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement) and providing lawful and appropriate
assistance to the adviser in the performance of its decision-making
responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____ of
the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers or
dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions with
dealers, the investment adviser may also consider the amount of portfolio
shares a broker-dealer has sold and the referral of other clients by the
broker to the adviser, subject to the requirements of best execution described
above. In addition, the portfolio may place trades with qualified broker-
dealers who recommend the portfolio or who act as agents in the purchase of
portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for each Fund 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 Funds, in a fair and reasonable
manner. Although there is no specified formula for allocating such
transactions, the Company'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 Funds 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 Funds execute 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 two fiscal years, the portfolios paid the following in brokerage
commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
--------------------------------------------------------------------------------
<S> <C>
Growth Portfolio
2000
--------------------------------------------------------------------------------
1999 $ 251,774
--------------------------------------------------------------------------------
Equity Portfolio
2000
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
1999 $ 124,840
--------------------------------------------------------------------------------
Special Equity Portfolio
2000
--------------------------------------------------------------------------------
1999 $1,338,694
--------------------------------------------------------------------------------
Strategic Balanced Portfolio
2000
--------------------------------------------------------------------------------
1999 $ 121,366
--------------------------------------------------------------------------------
Bond Portfolio
2000
--------------------------------------------------------------------------------
1999 $ 0
</TABLE>
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Company 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
Company is an diversified, open-end management company. This means that with
respect to 75% of its total assets, the Funds may not invest more than 5% of
its total assets in the securities of any one issuer (other than U.S.
Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the Company
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
Company. 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
Company's governing board.
If the Company is liquidated, the shareholders of each Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or in
the case of a class, belonging to that Fund and allocable to that class. The
Company will distribute is net assets to its shareholders in proportion to the
number of shares of that Fund or class thereof held by them and recorded on
the books of the Company. The liquidation of any Fund or class thereof may be
authorized at any time by vote of a majority of the members of the governing
board.
The Company will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing and
the distribution of such shares pursuant to a distribution plan or other
12b-1 plan;
37
<PAGE>
. Institutional Service 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;
and
. Advisor 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. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Funds at NAV
(as of the business day following the record date). Shareholders may change
their dividend and distributions option by writing to the Funds at least three
days before the record date for income dividend or capital gain distribution.
Each Fund send account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The Funds intend 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 it generally will be relieved of federal income
and excise taxes. If the Fund were to fail to make sufficient distributions in
a year, it would be subject to corporate income taxes and/or excise taxes. In
addition, if the shortfall were large enough, the Funds could be disqualified
as a regulated investment company. If a Fund was 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. Moreover, if a Fund was to
fail to make sufficient distributions in a year, the Fund would be subject to
corporate income taxes and/or excise taxes in respect of the shortfall or, if
the shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year period
ending October 31 of such calendar year and 100% of any such amounts that were
not distributed in the prior year. The Funds intend to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Fund on December
31 of such year if such dividends are actually paid during January of the
following year.
As of [ ], the Fund has no capital loss carryovers.
38
<PAGE>
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Funds is equal to the
NAV of its Fund. The Fund calculates its NAV 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 Fund,
plus cash and other assets plus income accrued but not yet received.
Each Fund 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
Funds must receive proper payment for the order by the time it calculates its
NAV on the following business day. Service Agents are responsible to their
customers and the Company 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 the Funds. The Company 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 Company 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
Funds' shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares of
Funds the with securities, instead of cash. If the Company 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 Company will
issue shares of the Funds at the NAV of the Fund determined as of the same
time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Funds;
. 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 Funds and are delivered to the Funds
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 Funds cannot exceed 5% of the net assets of
the Funds. 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 Funds' investments.
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 Company 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
40
<PAGE>
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
Company or UAMSSC may be liable for any losses due to unauthorized or
fraudulent telephone instructions if the Company or the UAMSSC do not employ
the procedures described above. Neither the Company 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 Funds to make payment wholly or
partly in cash, the Funds may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the Funds 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 Funds have 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 Funds 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 Funds. 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 Company 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 Company will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Company will
pay your redemption proceeds earlier as applicable law so requires.
The Company 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
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or to fairly determine the value of its
assets; or
. for such other periods as the SEC may permit.
41
<PAGE>
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
Board 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 other mutual funds in
the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Funds to another person by making a
written request to the Funds. 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 Funds measure 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 Funds calculate their 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 Funds 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 Funds 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).
42
<PAGE>
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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Shorter of 10 Years 30-Day
One Year Five Years or Since Inception Yields Inception Date
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio
------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 12/1/93
------------------------------------------------------------------------------------------------------------------
Institutional Service Class Shares 3/22/96
------------------------------------------------------------------------------------------------------------------
Equity Portfolio
------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 7/1/96
------------------------------------------------------------------------------------------------------------------
Special Equity Portfolio
------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 10/2/89
------------------------------------------------------------------------------------------------------------------
Strategic Balanced Portfolio
------------------------------------------------------------------------------------------------------------------
Institutional Class Shares 12/1/93
------------------------------------------------------------------------------------------------------------------
Bond Portfolio
------------------------------------------------------------------------------------------------------------------
Institutional Class Shares
------------------------------------------------------------------------------------------------------------------
Institutional Service Class Shares
</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 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
43
<PAGE>
. 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 Funds' October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Funds' Annual Reports are incorporated by
reference herein. Shareholders may get copies of the Funds' 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 Funds.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of the
series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their Funds.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
44
<PAGE>
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
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 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.
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<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:
46
<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.
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 o bligation 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.
47
<PAGE>
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.
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.
48
<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.
49
<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.
50
<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.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
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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.
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
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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 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 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.
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. 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
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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.
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 __, 2001
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the Funds dated February
__, 2001, as supplemented from time to time. You may obtain the Funds'
prospectus by contacting the UAM Funds at the address listed above.
<PAGE>
<TABLE>
Table Of Contents
<S> <C>
Description of Permitted Investments........................................ 1
Borrowing.................................................................. 1
Debt Securities............................................................ 1
Derivatives................................................................ 7
Equity Securities.......................................................... 15
Foreign Securities......................................................... 17
Investment Companies....................................................... 20
Repurchase Agreements...................................................... 21
Restricted Securities...................................................... 21
Securities Lending......................................................... 21
Short Sales................................................................ 22
When Issued Transactions................................................... 23
Investment Policies of the Funds............................................ 23
Fundamental Policies....................................................... 23
Non-Fundamental Policies................................................... 24
Management of the Company................................................... 25
Board Members.............................................................. 25
Officers................................................................... 26
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
CODE OF ETHICS............................................................. 32
Brokerage Allocation and Other Practices.................................... 32
Selection of Brokers....................................................... 32
Simultaneous Transactions.................................................. 33
Brokerage Commissions...................................................... 33
Capital Stock and Other Securities.......................................... 34
Purchase, Redemption and Pricing of Shares.................................. 36
Net Asset Value Per Share.................................................. 36
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............................................. 46
Fitch IBCA Ratings......................................................... 48
Comparative Benchmarks...................................................... 49
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Funds' prospectus, the Funds may use a variety of
investment strategies in addition to its principal investment strategies.
This SAI describes each of these investments/strategies and their risks. The
Funds may not notify shareholders before employing new strategies, unless it
expects such strategies to become principal strategies. You can find more
information concerning the limits on the ability of the Funds to use these
investments in "Investment Policies of the Funds?"
BORROWING
--------------------------------------------------------------------------------
The Funds may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 33 1/3% of its total assets
(including the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss.
To mitigate the risks of leverage, the Fund will limit the amount it may
borrow to not more than 33 1/3% of its total assets, taken at market value.
In addition, the Funds will only borrow from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
The Funds will not purchase securities while borrowings are outstanding
except to exercise prior commitments and to exercise subscription rights.
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
"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.
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<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 the Funds.
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
considered the equivalent of treasury securities and are backed by the full
faith and credit of the U.S. government. 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 Fund shares. To buy GNMA securities, the Funds may have to pay a
premium over the maturity value of the underlying mortgages, which the Fund
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
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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. For example, payments of
interest and principal are more frequent (usually monthly) and their interest
rates are sometimes adjustable. In addition, 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 Funds 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.
The Funds 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.
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Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest monthly and have a
more focused range of principal payment dates than pass-through securities.
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 Funds 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 Funds 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
Funds 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 Funds 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 Funds 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
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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 Funds' 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 Funds may 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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund 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. The Funds
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 Funds. If left unattended,
drifts in the average maturity of the Funds can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Funds.
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Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Funds' average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Funds 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." If 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 Funds 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 Funds 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 Fund 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 Funds are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
DERIVATIVES
-------------------------------------------------------------------------------
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. Unless otherwise stated
in the Funds' prospectus, the Funds may use derivatives to gain exposure to
various markets in a cost efficient manner, to
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reduce transaction costs or to remain fully invested. The Funds may also
invest in derivatives to protect it from broad fluctuations in market prices,
interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Funds 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 Funds
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 or custodian bank, 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 Funds may incur commission expenses when it opens or closes a futures
position.
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 Funds 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 Funds 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
Funds 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 Funds obtain the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The Funds would normally purchase call options in anticipation
of an increase in the market value of securities it owns or wants to buy. The
Funds 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 Funds 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 Funds 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 Funds
write 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 Funds 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 Funds 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 Funds 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 Funds would hope to profit by closing out the
put option at a lower price. If security prices fall, the Funds 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 Funds 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 Funds 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 Funds would expect the option to expire and
the premium it received to offset the decline of the security's value.
However, the Funds 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 Funds are permitted only to write covered options. At the time of selling
the call option, the Funds may cover the option by owning:
. 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.
At the time of selling a put option, the Funds may cover the put option by:
. 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 Funds may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Funds 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 Funds 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 Funds 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 Funds 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 Funds
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 Funds.
Combined Positions
The Funds 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 Funds could
construct a
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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 Funds 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 Funds
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 Funds 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 Funds 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 Funds could also hedge the position by
selling another currency expected to perform similarly to the currency in
which the Funds' 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 Funds 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 Funds 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 Funds 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.
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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 Funds 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 Funds
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 Funds 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 Funds. If a swap agreement calls for payments by the Funds, the Funds
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 Funds 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 Funds 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 Funds' gains
or losses. In order to reduce the risk associated with leveraging, the Funds
may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Funds 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 Funds' accrued obligations under the swap agreement
over the accrued amount the Funds are 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 Funds'
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 Funds 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, the Funds could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the Funds enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Funds may have to pay more
money than it receives. Similarly, if the Funds enter
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into a swap where it agrees to exchange a fixed rate of interest for a
floating rate of interest, the Funds 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. The Funds 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 Funds than if it had not entered into any
derivatives transactions. Derivatives may magnify the Funds' 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
Funds holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Funds to greater risks.
Correlation of Prices
The Funds' 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 Funds are 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 Funds' prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Funds 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 Funds. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Funds against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Funds' 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 Funds' investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Funds can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Funds may close out a futures contract only on the exchange the
contract was initially traded. Although the Funds intend 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 Funds may not be able
to close out its position. In an illiquid market, the Funds 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 Funds may lose money by investing in derivatives. For example, if the
Funds 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 Funds could be required to sell the security upon exercise at a
price below the current market price. Similarly, if the Funds 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 Funds
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, the Funds 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 Funds and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Funds may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Funds 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuer's
common stock at the Fund's option during a specified time period (such as
convertible preferred stocks, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer's capital structure, but is usually subordinated to
similar non-convertible securities. 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. In general, the market value of
a convertible security is at least the higher of its "investment value' (i.e.,
its value as a fixed income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock).
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. The price of a convertible security tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying common stock declines.
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A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. Government securities and (ii) call options or warrants
on the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has
similar investment characteristics, but may differ with respect to credit
quality, time to maturity, trading characteristics, and other factors. Because
the Fund will create synthetic convertible positions only out of high grade
fixed income securities, the credit rating associated with the Fund's
synthetic convertible investments is generally expected to be higher than that
of the average convertible security, many of which are rated below high grade.
However, because the options used to create synthetic convertible positions
will generally have expirations between one month and three years of the time
of purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset (in
the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences in
maturities, and the Adviser and applicable sub-adviser take such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Fund may extend the maturity by investing in a new option with longer maturity
on the common stock of the same or different issuer. If the Fund does not so
extend the maturity of a position, it may continue to hold the associated
fixed income security.
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.
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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
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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;
. 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 Funds ability to invest in a particular country or make it
very expensive for the Funds to invest in that country. Some countries
require prior governmental
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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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as,
those in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and
erratic price movements;
. have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than
those in U.S. markets; and
. 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.
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Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries it is possible for the Funds to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the Funds receive from its investments. The Funds do 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 Funds also anticipates pricing, trading, settling
and valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the Funds expect 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 Funds 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 Funds. Like other shareholders, the Funds would pay
its proportionate share of those fees. Consequently, shareholders of the Funds
would pay not only the management fees of
20
<PAGE>
the Fund, but also the management fees of the investment company in which the
Fund invests. The Funds 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 Funds in the UAM Complex 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 Funds' investment policies and restrictions; and
. The Funds' adviser waives any fees it earns on the assets of the Fund that
is invested in the UAM DSI Money Market Portfolio.
The Funds 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 Funds normally use repurchase agreements to earn income
on assets that are not invested.
When the Funds enter 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 Funds' right to sell the
security may be restricted. In addition, the value of the security might
decline before the Funds can sell it and the Funds might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Funds may purchase restricted securities that are not registered for sale
to the general public. The Funds may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Funds' investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Funds
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Funds 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. If the Funds lend 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;
21
<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
Funds 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 Funds lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Funds 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.
SHORT SALES
--------------------------------------------------------------------------------
Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
The Funds can lose money if the price of the security it sold short increases
between the date of the short sale and the date on which the Funds replace the
borrowed security. Likewise, the Funds can profit if the price of the security
declines between those dates.
To borrow the security, the Funds also may be required to pay a premium, which
would increase the cost of the security sold. The Funds will incur transaction
costs in effecting short sales. The Funds' gains and losses will be decreased
or increased, as the case may be, by the amount of the premium, dividends,
interest, or expenses the Funds may be required to pay in connection with a
short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, the Funds may engage in short sales "against the box." In a
short sale against the box, the Funds agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no extra
cost. The Funds will incur transaction costs to open, maintain and close short
sales against the box.
Restrictions on Short Sales
The Funds will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Funds net
assets.
22
<PAGE>
. The market value of the securities of any single issuer that have been sold
short by the Funds would exceed the two percent (2%) of the value of the
Funds' net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Funds sell a security short, its custodian segregates an amount
of cash or liquid securities equal to the difference between (a) the market
value of the securities sold short at the time they were sold short and (b)
any cash or U.S. Government securities the Funds are required to deposit with
the broker in connection with the short sale (not including the proceeds from
the short sale). The segregated assets are marked to market daily in an
attempt to ensure that the amount deposited in the segregated account plus the
amount deposited with the broker is at least equal to the market value of the
securities at the time they were sold short.
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
Funds contract 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 Funds have
committed to purchase before the securities are delivered, although the Funds
may earn income on securities it has in a segregated account. The Funds 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 Funds would use 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 Funds engage 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 Funds 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 Funds assume 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 Funds do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the Funds
The Funds 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 Funds 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 that the
Funds cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Funds will not:
. Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This restriction
does not, however, apply to any portfolio classified as a non-diversified
series of an open-end investment company under the 1940 Act.
. Borrow money, except to the extent permitted by applicable law, as amended and
interpreted or modified from time to time by any regulatory authority having
jurisdiction and the guidelines set forth in a Fund's prospectus and statement
of additional information as they may be amended from time to time.
23
<PAGE>
. Issue senior securities, except to the extent permitted by applicable law, as
amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest in,
securities of issuers that deal or invest in real estate and (3) that a Fund
may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Funds may
change them without shareholder approval. The Funds may:
. purchase and sell currencies or securities on a when-issued, delayed delivery
or forward-commitment basis.
. purchase and sell foreign currency, purchase options on foreign currency and
foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of its
investable assets in securities of a single open-end management investment
company with substantially the same investment objectives, policies and
limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Funds intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities, including
(1) treating as illiquid securities that may not be disposed of in the
ordinary course of business within 7 days at approximately the value at which
the portfolio has valued the investment on its books; and (2) limiting its
holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other institutional
investors. These loans may not exceed 33 1/3% of the portfolio's total assets
taken at market value. In addition, a Fund must receive at least 100%
collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
24
<PAGE>
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the
following fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events per
year.
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting fee
and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Funds in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
-------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the Company as that term is defined in the 1940 Act. Mr. English
has an investment advisory relationship with Investment Counselors of
Maryland, an investment adviser to one of the Funds in the UAM Funds Complex.
However, the Company does not believe that the relationship is a material
business relationship, and, therefore, does not consider him to be an
interested Board member. If these circumstances change, the Board will
determine whether any action is required to change the composition of the
Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
===================================================================================================================================
<S> <C> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management Company,
RR2 Box 700 Inc. and Great Island Investment Company, Inc. (investment
Center Harbor, NH 03226 management). From 1988 to 1993, Mr. Bennett was President of
1/26/29 Bennett Management Company. Mr. Bennett serves on the Board of
each Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn was
Washington, DC 20037 Vice President for Finance and Administration and Treasurer of
8/14/51 Radcliffe College (Education). Ms. Dunn serves on the Board of
each Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June 1998
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law firm
Dechert Price & Rhoads from July 1976 to June 1998. He was also
formerly a Director of Hofler Corp. (manufacturer of gear
grinding machines). Mr. Humenuk serves on the Board of each
Company in the UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From UAM Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 years 10/31/00 10/31/00
====================================================================================================================================
<S> <C> <C> <C>
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the investment
Baltimore, MD 21201 management business. He is also Chairman of the Board of Chektec
8/5/48 Corporation (Drugs) and Cyber Scientific, Inc. (computer mouse
company). Mr. English serves on the Board of each Company in the
UAM Funds Complex.
-----------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since May
One International Place 2000; Chairman and Chief Executive Officer of UNUM Corporation 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee of Bates College and the
3/5/43 Committee for Economic Development; Chairman-elect of the Board
of Trustees of the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of Public Health; Director
of the Nashua Corporation and the National Alliance of Business.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides information
regarding their present positions, date of birth, address and their principal
occupations during the past five years. The Company's officers are paid by
UAM, its affiliates or SEI, but not by the Company.
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
====================================================================================================================================
<S> <C> <C> <C> <C>
James F. Orr III* Board President, Chief Executive Officer and Director of 0 0
One International Place Member UAM since May 2000; Chairman and Chief Executive
Boston, MA 02110 President Officer of UNUM Corporation (Insurance) from 1988 to
3/5/43 1999; Trustee of Bates College and the Committee for
Economic Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for Society,
and the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua Corporation
and the National Alliance of Business.
------------------------------------------------------------------------------------------------------------------------------------
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer) since
April 2000; Senior Vice President and Secretary of
Signature Financial Group, Inc. (financial services)
and affiliated broker-dealers from 1991 to 2000;
Director and Secretary of Signature Financial Group
Europe, Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000; Secretary of the 59
Wall Street Family of Mutual Funds (mutual funds)
from 1996 to 2000.
------------------------------------------------------------------------------------------------------------------------------------
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
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 years October 31, 1999 of October 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer of
Boston, MA 02110 UAMFDI (broker-dealer) since February 2000; Assistant
12/23/63 Vice President of Scudder Kemper Investments
(financial services) from May 1992 to February 1998.
------------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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. 24.11% Sterling Partners' Balanced Institutional
FBO Interstate Brands Portfolio Class Shares
Conservative Growth
P.O. Box 419175
Kansas City, MO 64141-6175
---------------------------------------------------------------------------------------------------------------------------------
Centura Bank 11.38% Sterling Partners' Balanced Institutional
P.O. Box 1220 Portfolio Class Shares
Attn: Roxanne Moore
131 N. Church Street
Rocky Mount, NC 27804-5433
---------------------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 15.70% Sterling Partners' Balanced Institutional
FBO Interstate Brands Portfolio Class Shares
Moderate Growth
P.O. Box 419175
Kansas City, MO 64141-6175
---------------------------------------------------------------------------------------------------------------------------------
UMBSC & Co. 8.76% Sterling Partners' Balanced Institutional
FBO IBC Savings Invest-CONS GR Portfolio Class Shares
PO Box 419692
Kansas City, MO 64141-6692
---------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 7.20% Sterling Partners' Balanced Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco CA 94104-4122
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Percentage of Shares
Shareholder Owned Portfolio Class
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles Schwab & Co., Inc. 25.32% Sterling Partners Small Cap Value Institutional
Reinvest Account Portfolio Class Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
------------------------------------------------------------------------------------------------------------------------------------
Northern Trust Company CUST 7.65% Sterling Partners' Small Cap Value Institutional
FBO Holly Cross Employee Portfolio Class Shares
Retirement Trust HLT Plan
P.O. Box 92956
Chicago, IL 60675-2956
------------------------------------------------------------------------------------------------------------------------------------
Bost & Co 5.32% Sterling Partners' Small Cap Value Institutional
FBO Endowment For Health Inc. Portfolio Class Shares
Mutual Funds Operations
PO Box 3198
Pittsburg, PA 15230-3198
------------------------------------------------------------------------------------------------------------------------------------
Horizon Benefits Inc. 6.07% Sterling Partners' Small Cap Value Institutional
5925 Carnegie Blvd. Ste 104 Portfolio Class Shares
Charlotte, NC 28209-4656
</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 December 15,
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 the Funds. The adviser manages
and supervises the investment of Fund'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.
United Asset Management Corporation is a wholly-owned subsidiary of Old Mutual
plc, a United Kingdom based financial services group.
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>
INSERT INVESTMENT PERSONNEL
Investment Advisory Agreement
This section summarizes some of the important provisions the Investment
Advisory Agreements. The Company 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 the Funds' assets;
. Continuously reviews, supervises and administers the investment program of
the Funds; and
. Determines what portion of the Funds' 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 Company, 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 Funds.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Funds' 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
Company.
An Investment Advisory Agreement will automatically and immediately terminate
if it is assigned.
Advisory Fees
For its services, the Funds pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of each Fund.
Due to the effect of fee waivers by the adviser, the actual percentage of
average net assets that the Funds pay 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 Funds 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 Value Portfolio
2000
-----------------------------------------------------------------------------------------------------------------
1999 $306,848 $104,588 $411,436
1998 $169,817 $ 73,508 $243,325
-----------------------------------------------------------------------------------------------------------------
Balanced Portfolio
2000
-----------------------------------------------------------------------------------------------------------------
1999 $493,540 $ 64,548 $558,088
1998 $608,044 $ 0 $608,044
</TABLE>
DISTRIBUTOR
--------------------------------------------------------------------------------
UAMFDI serves as the distributor for each Fund of the Company. The Company
offers its shares continuously. While UAMFDI will use its best efforts to
sell shares of the Funds, 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 Company or the Funds. 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
Funds.
ADMINISTRATIVE SERVICES
--------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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 Company. UAMFSI will pay such people for
such employment. The Company will not incur any obligations with respect to
such people. Other expenses incurred in the operation of the Company will be
borne by the Company 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.
30
<PAGE>
. 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 Funds.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as follows:
. $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 Fund at the
following rates:
Annual Rate
---------------------------------------------------------------------
Small Cap Value Portfolio 0.043%
---------------------------------------------------------------------
Balanced Portfolio 0.063%
2. An annual fee to UAMFSI for sub-administration and other services, which
UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
31
<PAGE>
. and $2,500 for each additional class.
For the last three fiscal years the Funds paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrator's Fee Sub-Administrator's Fee Total Administration Fee
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Value Portfolio
2000
---------------------------------------------------------------------------------------------------------
1999 $25,532 $68,387 $ 93,919
1998 $15,483 $66,555 $ 82,038
---------------------------------------------------------------------------------------------------------
Balanced Portfolio
2000
---------------------------------------------------------------------------------------------------------
1999 $56,040 $81,638 $137,678
1998 $51,575 $82,561 $134,136
</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 Company.
INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
CODE OF ETHICS
--------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a code
of ethics under Rule 17j-1 of the 1940 Act that permits investment personnel
to purchase and sell securities for their personal account.
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 Funds. The Investment Agreement also directs the adviser
to use its best efforts to obtain the best execution with respect to all
transactions for the Funds. 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 Funds 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. Research services provided
by brokers through which the Fund effects securities transactions may be used
by the portfolio's investment adviser in servicing all of its accounts and
not all of these services may be used by the adviser in connection with the
portfolio. Such research include research reports on particular industries
and companies, economic surveys and analyses, recommendations as to specific
securities and other products or services (e.g., quotation equipment and
computer related costs and expenses), advice concerning the value of
securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or the purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance
of accounts, effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement) and providing lawful
and appropriate assistance to the adviser in the performance of its decision-
making responsibilities.
32
<PAGE>
During the fiscal year ended October 31, 2000, the adviser directed $____ of
the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers or
dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions with
dealers, the investment adviser may also consider the amount of portfolio
shares a broker-dealer has sold and the referral of other clients by the
broker to the adviser, subject to the requirements of best execution described
above. In addition, the portfolio may place trades with qualified broker-
dealers who recommend the portfolio or who act as agents in the purchase of
portfolio shares for their clients.
SIMULTANEOUS TRANSACTIONS
--------------------------------------------------------------------------------
The adviser makes investment decisions for each Fund 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 Funds, in a fair and reasonable
manner. Although there is no specified formula for allocating such
transactions, the Company'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 Funds 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 Funds execute 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 two fiscal years, the portfolios paid the following in brokerage
commissions:
Brokerage Commissions
----------------------------------------------------------
Small Cap Value Portfolio
2000
----------------------------------------------------------
1999 $134,535
----------------------------------------------------------
Balanced Portfolio
2000
----------------------------------------------------------
1999 $134,507
33
<PAGE>
Capital Stock and Other Securities
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Company 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
Company is an diversified, open-end management company. This means that with
respect to 75% of its total assets, the Funds may not invest more than 5% of
its total assets in the securities of any one issuer (other than U.S.
Government Securities).
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the Company
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
Company. 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
Company's governing board.
If the Company is liquidated, the shareholders of each Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or in
the case of a class, belonging to that Fund and allocable to that class. The
Company will distribute is net assets to its shareholders in proportion to the
number of shares of that Fund or class thereof held by them and recorded on
the books of the Company. The liquidation of any Fund or class thereof may be
authorized at any time by vote of a majority of the members of the governing
board.
The Company will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing and
the distribution of such shares pursuant to a distribution plan or other
12b-1 plan;
. Institutional Service 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;
and
. Advisor 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. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
34
<PAGE>
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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 Funds at NAV
(as of the business day following the record date). Shareholders may change
their dividend and distributions option by writing to the Funds at least three
days before the record date for income dividend or capital gain distribution.
Each Fund send account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The Funds intend 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 it generally will be relieved of federal income
and excise taxes. If the Fund were to fail to make sufficient distributions in
a year, it would be subject to corporate income taxes and/or excise taxes. In
addition, if the shortfall were large enough, the Funds could be disqualified
as a regulated investment company. If a Fund was 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. Moreover, if a Fund was to fail
to make sufficient distributions in a year, the Fund would be subject to
corporate income taxes and/or excise taxes in respect of the shortfall or, if
the shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year period
ending October 31 of such calendar year and 100% of any such amounts that were
not distributed in the prior year. The Funds intend to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Fund on December
31 of such year if such dividends are actually paid during January of the
following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
35
<PAGE>
Purchase, Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Funds is equal to the
NAV of its Fund. The Fund calculates its NAV 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 Fund,
plus cash and other assets plus income accrued but not yet received.
Each Fund 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
Funds must receive proper payment for the order by the time it calculates its
NAV on the following business day. Service Agents are responsible to their
customers and the Company for timely transmission of all subscription and
redemption requests, investment information, documentation and money.
36
<PAGE>
Shareholders can buy full and fractional (calculated to three decimal places)
shares of the Funds. The Company will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Company 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
Funds' shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares of
Funds the with securities, instead of cash. If the Company 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 Company will
issue shares of the Funds at the NAV of the Fund determined as of the same
time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Funds;
. 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 Funds and are delivered to the Funds
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 Funds cannot exceed 5% of the net assets of
the Funds. 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 Funds' investments.
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:
37
<PAGE>
. 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 Company 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 Company or UAMSSC may be liable for any losses due
to unauthorized or fraudulent telephone instructions if the Company or the
UAMSSC do not employ the procedures described above. Neither the Company 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 Funds to make payment wholly or
partly in cash, the Funds may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the Funds 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 Funds have 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 Funds 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 Funds. 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 Company 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 Company will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the Company will
pay your redemption proceeds earlier as applicable law so requires.
38
<PAGE>
The Company 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
SEC as a result of which it is not reasonably practicable for the Fund to
dispose of securities owned by it, or to fairly determine the value of its
assets; or
. for such other periods as the SEC may permit.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
Board 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 other mutual funds in
the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Funds to another person by making a
written request to the Funds. 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 Funds measure 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 Funds calculate their 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 Funds 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 Funds 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:
39
<PAGE>
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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
Inception Date Shorter of 10 Years 30- Day
One Year Five Years or Since Inception Yield Inception Date
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Small Cap Value Portfolio
-----------------------------------------------------------------------------------------------------------
Balanced Portfolio
</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
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;
40
<PAGE>
. 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 Funds' October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Funds' Annual Reports are incorporated by
reference herein. Shareholders may get copies of the Funds' 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 Funds.
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of the
series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their Funds.
41
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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.
BONDS RATINGS
--------------------------------------------------------------------------------
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 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.
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.
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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.
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.
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<PAGE>
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.
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 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
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.
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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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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
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.
49
<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 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
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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.
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:
----------------------------
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<PAGE>
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.
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:
-------------------------------
52
<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.
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.
53
<PAGE>
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.
54
<PAGE>
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 __, 2001
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectus of the Funds dated
February __, 2001, as supplemented from time to time. You may obtain the
Funds' prospectus by contacting the UAM Funds at the address listed
above.
<PAGE>
<TABLE>
Table Of Contents
<S> <C>
Description of Permitted Investments..................................... 1
Borrowing............................................................... 1
Debt Securities......................................................... 1
Derivatives............................................................. 7
Equity Securities....................................................... 15
Foreign Securities...................................................... 17
Investment Companies.................................................... 20
Repurchase Agreements................................................... 20
Restricted Securities................................................... 21
Securities Lending...................................................... 21
Short Sales............................................................. 21
When Issued Transactions................................................ 22
Investment Policies of the funds......................................... 23
Fundamental Policies.................................................... 23
Non-Fundamental Policies................................................ 23
Management of the Company................................................ 24
Board Members........................................................... 24
Officers................................................................ 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
CODE OF ETHICS.......................................................... 32
Brokerage Allocation and Other Practices................................. 32
Selection of Brokers.................................................... 32
Simultaneous Transactions............................................... 33
Brokerage Commissions................................................... 33
Capital Stock and Other Securities....................................... 33
Purchase, Redemption and Pricing of Shares............................... 35
Net Asset Value Per Share............................................... 35
Purchase of Shares...................................................... 36
Redemption of Shares.................................................... 37
Exchange Privilege...................................................... 38
Transfer Of Shares...................................................... 38
Performance Calculations................................................. 39
Total Return............................................................ 39
Yield................................................................... 39
Comparisons............................................................. 40
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
</TABLE>
<PAGE>
Description of Permitted Investments
As described in the Funds' prospectus, the Funds may use a variety of
investment strategies in addition to its principal investment strategies.
This SAI describes each of these investments/strategies and their risks.
The Funds may not notify shareholders before employing new strategies,
unless it expects such strategies to become principal strategies. You can
find more information concerning the limits on the ability of the Funds to
use these investments in "Investment Policies of the Funds?"
BORROWING
--------------------------------------------------------------------------------
The Funds may not borrow money, except that if permitted by its fundamental
investment policies:
. It may borrow from banks (as defined in the 1940 Act) or enter into reverse
repurchase agreements, in amounts up to 33 1/3% of its total assets
(including the amount borrowed);
. It may borrow up to an additional 5% of its total assets from anyone for
temporary purposes;
. It may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of portfolio securities; and
. It may purchase securities on margin and engage in short sales to the
extent permitted by applicable law.
Borrowing is a form of leverage, which may magnify the Fund's gain or loss.
To mitigate the risks of leverage, the Fund will limit the amount it may
borrow to not more than 33 1/3% of its total assets, taken at market value.
In addition, the Funds will only borrow from banks as a temporary measure
for extraordinary or emergency purposes such as the redemption of Fund
shares. The Funds will not purchase securities while borrowings are
outstanding except to exercise prior commitments and to exercise
subscription rights.
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
"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.
1
<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 the Funds.
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 considered the equivalent of treasury securities and are
backed by the full faith and credit of the U.S. government. 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 Fund shares. To buy GNMA
securities, the Funds may have to pay a premium over the maturity value of
the underlying mortgages, which the Fund 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.
2
<PAGE>
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. For example, payments of
interest and principal are more frequent (usually monthly) and their
interest rates are sometimes adjustable. In addition, 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 Funds 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.
The Funds 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 monthly and have a
more focused range of principal payment dates than pass-through securities.
While whole mortgage loans may collateralize CMOs, mortgage-backed
securities guaranteed by GNMA, FHLMC, or FNMA and their income streams more
typically collateralize them.
3
<PAGE>
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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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
4
<PAGE>
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 Funds' 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 Funds may 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.
Mutual funds that invest in debt securities have no real maturity. Instead,
they calculate their weighted average maturity. This number is an average of
the effective or anticipated maturity of each debt security held by the mutual
fund, with the maturity of each security weighted by the percentage of the
assets of the mutual fund it represents.
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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. The Funds
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 Funds. If left unattended,
drifts in the average maturity of the Funds can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the Funds.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause the Funds' average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the Funds 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.
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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." If 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 Funds 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 Funds 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 Fund 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 Funds are not obligated to dispose of securities whose
issuers subsequently are in default or which are downgraded below the above-
stated ratings. The Fund may invest in securities of any rating.
DERIVATIVES
--------------------------------------------------------------------------------
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. Unless otherwise stated
in the Funds' prospectus, the Funds may use derivatives to gain exposure to
various markets in a cost efficient manner, to reduce transaction costs or to
remain fully invested. The Funds may also invest in derivatives to protect it
from broad fluctuations in market prices, interest rates or foreign currency
exchange rates (a practice known as "hedging"). When hedging is successful,
the Funds 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 Funds 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.
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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 or custodian bank, 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 Funds may incur commission expenses when it opens or closes a futures
position.
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 Funds 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 Funds 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 Funds 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 Funds obtain the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The Funds would normally purchase call options in anticipation
of an increase in the market value of securities it owns or wants to buy. The
Funds 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 Funds 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;
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. 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 Funds 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 Funds
write 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 Funds 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 Funds 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 Funds 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 Funds would hope to profit by
closing out the put option at a lower price. If security prices fall, the
Funds 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 Funds 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 Funds 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 Funds would expect the option to expire and
the premium it received to offset the decline of the security's value.
However, the Funds 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 Funds are permitted only to write covered options. At the time of selling
the call option, the Funds may cover the option by owning:
. 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.
At the time of selling a put option, the Funds may cover the put option by:
. 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 Funds may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Funds 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 Funds 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 Funds 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 Funds 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 Funds
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 Funds.
Combined Positions
The Funds 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 Funds 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 Funds 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.
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. 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 Funds
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 Funds 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 Funds 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 Funds could also hedge the position by
selling another currency expected to perform similarly to the currency in
which the Funds' 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds
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 Funds 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 Funds. If a swap agreement calls for payments by the Funds, the
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Funds 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 Funds 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 Funds 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 Funds' gains
or losses. In order to reduce the risk associated with leveraging, the Funds
may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Funds 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 Funds' accrued obligations under the swap agreement
over the accrued amount the Funds are 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 Funds'
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 Funds 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, the Funds could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the Funds enter into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Funds may have to pay more
money than it receives. Similarly, if the Funds enter into a swap where it
agrees to exchange a fixed rate of interest for a floating rate of interest,
the Funds 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. The Funds 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 Funds than if it had not entered into any
derivatives transactions. Derivatives may magnify the Funds' 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
Funds holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the Funds to greater risks.
Correlation of Prices
The Funds' 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 Funds are 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 Funds' prediction of interest and currency rates,
market value, volatility or other economic factors is incorrect, the Funds 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 Funds. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Funds against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Funds' 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 Funds' investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the Funds can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, the Funds may close out a futures contract only on the exchange the
contract was initially traded. Although the Funds intend 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 Funds may not be able
to close out its position. In an illiquid market, the Funds 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.
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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 Funds may lose money by investing in derivatives. For example, if the
Funds 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 Funds could be required to sell the security upon exercise at a
price below the current market price. Similarly, if the Funds 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 Funds
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, the Funds 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 Funds and it may
lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Funds may have to
sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The Funds 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 securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuer's
common stock at the Fund's option during a specified time period (such as
convertible preferred stocks, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer's capital structure, but is usually subordinated to
similar non-convertible securities. 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. In general, the market value of
a convertible security is at least the higher of its "investment value' (i.e.,
its value as a fixed income security) or its "conversion value" (i.e., its
value upon conversion into its underlying common stock).
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. The price of a convertible security tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying common stock declines.
A synthetic convertible security is a combination investment in which the Fund
purchases both (i) high-grade cash equivalents or a high grade debt obligation
of an issuer or U.S. Government securities and (ii) call options or warrants
on the common stock of the same or different issuer with some or all of the
anticipated interest income from the associated debt obligation that is earned
over the holding period of the option or warrant.
While providing a fixed income stream (generally higher in yield than the
income derivable from common stock but lower than that afforded by a similar
non-convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. A synthetic convertible position has
similar investment characteristics, but may differ with respect to credit
quality, time to maturity, trading characteristics, and other factors. Because
the Fund will create synthetic convertible positions only out of high grade
fixed income securities, the credit rating associated with the Fund's
synthetic convertible investments is generally expected to be higher than that
of the average convertible security, many of which are rated below high grade.
However, because the options used to create synthetic convertible positions
will generally have expirations between one month and three years of the time
of purchase, the maturity of these positions will generally be shorter than
average for convertible securities. Since the option component of a
convertible security or synthetic convertible position is a wasting asset (in
the sense of losing "time value" as maturity approaches), a synthetic
convertible position may lose such value more rapidly than a convertible
security of longer maturity; however, the gain in option value due to
appreciation of the underlying stock may exceed such time value loss, the
market price of the option component generally reflects these differences in
maturities, and the Adviser and applicable sub-adviser take such differences
into account when evaluating such positions. When a synthetic convertible
position "matures" because of the expiration of the associated option, the
Fund may extend the maturity by
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investing in a new option with longer maturity on the common stock of the same
or different issuer. If the Fund does not so extend the maturity of a
position, it may continue to hold the associated fixed income security.
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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<PAGE>
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 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.
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<PAGE>
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 Funds ability to invest in a particular country or make it very expensive
for the Funds 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. Foreign stock markets:
. are generally more volatile than, and not as developed or efficient as, those
in the United States;
. have substantially less volume;
. trade securities that tend to be less liquid and experience rapid and erratic
price movements;
. have generally higher commissions and are subject to set minimum rates, as
opposed to negotiated rates;
. employ trading, settlement and custodial practices less developed than those
in U.S. markets; and
. 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 Funds to recover a
portion of these taxes, the portion that cannot be recovered will reduce the
income the Funds receive from its investments. The Funds do 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.
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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 Funds also anticipates pricing, trading, settling
and valuing investments whose nominal values remain in their existing domestic
currencies in Euros. Accordingly, the Funds expect 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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The Funds 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 Funds. Like other shareholders, the Funds would
pay its proportionate share of those fees. Consequently, shareholders of the
Funds would pay not only the management fees of the Fund, but also the
management fees of the investment company in which the Fund invests. The
Funds 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 Funds in the UAM Complex 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 Funds' investment policies and restrictions; and
. The Funds' adviser waives any fees it earns on the assets of the Fund that is
invested in the UAM DSI Money Market Portfolio.
The Funds 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 Funds normally use repurchase agreements to earn
income on assets that are not invested.
When the Funds enter 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).
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If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the Funds' right to sell the
security may be restricted. In addition, the value of the security might
decline before the Funds can sell it and the Funds might incur expenses in
enforcing its rights.
RESTRICTED SECURITIES
--------------------------------------------------------------------------------
The Funds may purchase restricted securities that are not registered for sale
to the general public. The Funds may also purchase shares 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 may not be treated as illiquid securities for purposes
of the Funds' investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the Funds
or less than what may be considered the fair value of such securities.
SECURITIES LENDING
--------------------------------------------------------------------------------
The Funds 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. If the Funds lend 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 Funds
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 Funds lend securities, there is a risk that the borrower will become
financially unable to honor its contractual obligations. If this happens, the
Funds 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.
SHORT SALES
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Description of Short Sales
Selling a security short involves an investor sale of a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the security
it borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
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The Funds can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
Funds replace the borrowed security. Likewise, the Funds can profit if the
price of the security declines between those dates.
To borrow the security, the Funds also may be required to pay a premium,
which would increase the cost of the security sold. The Funds will incur
transaction costs in effecting short sales. The Funds' gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the Funds may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, the Funds may engage in short sales "against the box." In a
short sale against the box, the Funds agrees to sell at a future date a
security that it either currently owns or has the right to acquire at no
extra cost. The Funds will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
The Funds will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the Funds net
assets.
. The market value of the securities of any single issuer that have been sold
short by the Funds would exceed the two percent (2%) of the value of the
Funds' net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever the Funds sell a security short, its custodian segregates an amount
of cash or liquid securities equal to the difference between (a) the market
value of the securities sold short at the time they were sold short and (b)
any cash or U.S. Government securities the Funds are required to deposit with
the broker in connection with the short sale (not including the proceeds from
the short sale). The segregated assets are marked to market daily in an
attempt to ensure that the amount deposited in the segregated account plus the
amount deposited with the broker is at least equal to the market value of the
securities at the time they were sold short.
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 Funds contract 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 Funds have
committed to purchase before the securities are delivered, although the Funds
may earn income on securities it has in a segregated account. The Funds 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 Funds would use 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 Funds engage 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 Funds 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 Funds assume 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
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takes place also may be higher than those obtained in the transaction itself.
Because the Funds do not pay for the security until the delivery date, these
risks are in addition to the risks associated with its other investments.
Investment Policies of the funds
The Funds 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 Funds 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 that the
Funds cannot change them without approval by the vote of a majority of the
outstanding voting securities of the Fund, as defined by the 1940 Act. The
Funds will not:
. Make any investment inconsistent with its classification as a diversified
series of an open-end investment company under the 1940 Act. This
restriction does not, however, apply to any portfolio classified as a non-
diversified series of an open-end investment company under the 1940 Act.
. Borrow money, except to the extent permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
having jurisdiction and the guidelines set forth in a Fund's prospectus and
statement of additional information as they may be amended from time to
time.
. Issue senior securities, except to the extent permitted by applicable law,
as amended and interpreted or modified from time to time by any regulatory
authority having jurisdiction.
. Underwrite securities of other issuers, except insofar as a portfolio may
technically be deemed to be an underwriter under the Securities Act of 1933
in connection with the purchase or sale of its portfolio securities.
. Concentrate its investments in the securities of one or more issuers
conducting their principal business activities in the same industry (other
than securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities).
. Purchase or sell real estate, except (1) to the extent permitted by
applicable law, as amended and interpreted or modified from time to time by
any regulatory authority having jurisdiction, (2) that a Fund may invest
in, securities of issuers that deal or invest in real estate and (3) that a
Fund may purchase securities secured by real estate or interests therein.
. Purchase or sell commodities or contracts on commodities except that a Fund
may engage in financial futures contracts and related options and currency
contracts and related options and may otherwise do so in accordance with
applicable law and without registering as a commodity pool operator under
the Commodity Exchange Act.
. Make loans to other persons, except that a Fund may lend its portfolio
securities in accordance with applicable law, as amended and interpreted or
modified from time to time by any regulatory authority having jurisdiction
and the guidelines set forth in a portfolio's prospectus and statement of
additional information as they may be amended from time to time. The
acquisition of investment securities or other investment instruments shall
not be deemed to be the making of a loan.
NON-FUNDAMENTAL POLICIES
--------------------------------------------------------------------------------
The following limitations are non-fundamental, which means the Funds may
change them without shareholder approval. The Funds may:
. purchase and sell currencies or securities on a when-issued, delayed
delivery or forward-commitment basis.
23
<PAGE>
. purchase and sell foreign currency, purchase options on foreign currency
and foreign currency exchange contracts.
. invest in the securities of foreign issuers.
. notwithstanding any fundamental policy or other limitation, invest all of
its investable assets in securities of a single open-end management
investment company with substantially the same investment objectives,
policies and limitations.
. invest in illiquid and restricted securities to the extent permitted by
applicable law. The Funds intends to follow the policies of the SEC as they
are adopted from time to time with respect to illiquid securities,
including (1) treating as illiquid securities that may not be disposed of
in the ordinary course of business within 7 days at approximately the value
at which the portfolio has valued the investment on its books; and (2)
limiting its holdings of such securities to 15% of net assets.
. purchase shares of other investment companies to the extent permitted by
applicable law.
. invest up to 10% of its total assets in the securities of other investment
companies. However, a Fund 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.
. write covered call options and may buy and sell put and call options.
. enter into repurchase agreements.
. lend portfolio securities to registered broker-dealers or other
institutional investors. These loans may not exceed 33 1/3% of the
portfolio's total assets taken at market value. In addition, a Fund must
receive at least 100% collateral.
. sell securities short and engage in short sales "against the box."
. enter into swap transactions.
Management of the Company
The Board manages the business of the company. The Board elects officers to
manager the day-to-day operations of the company and to execute policies the
Board has formulated. The Company pays each Independent Director the following
fees:
. A $200 quarterly retainer fee per active Fund;
. $3,000 for each meeting of the Board other than a private meeting or
telephonic meeting;
. $1,500 for each private meeting of the Board;
. $1,000 for each telephonic meeting of the Board; and
. $1,000 per day for attending seminars, up to a maximum of three events
per year.
In addition, the Company reimburses each Independent Director for travel and
other expenses incurred while attending board meetings. The $3,000 meeting fee
and expense reimbursements are aggregated for all of the Directors and
allocated proportionately among all Funds in the UAM Complex. The Company does
not pay its Interested Directors or officers for their services as Directors
or officers.
BOARD MEMBERS
--------------------------------------------------------------------------------
The following table lists the Board members and officers of the Company and
provides information regarding their present positions, date of birth,
address, principal occupations during the past five years, aggregate
compensation received from the Company and total compensation received from
the UAM Funds Complex. The UAM Funds Complex is currently comprised of __
Funds. Those people with an asterisk (*) beside their name are "interested
persons" of the
24
<PAGE>
Company as that term is defined in the 1940 Act. Mr. English has an investment
advisory relationship with Investment Counselors of Maryland, an investment
adviser to one of the Funds in the UAM Funds Complex. However, the Company
does not believe that the relationship is a material business relationship,
and, therefore, does not consider him to be an interested Board member. If
these circumstances change, the Board will determine whether any action is
required to change the composition of the Board.
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation from From Uam Funds
Name, Address, Date of Company as of Complex as of
Birth Principal Occupations During the Past 5 Years 10/31/00 10/31/00
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John T. Bennett, Jr. Mr. Bennett is President of Squam Investment Management Company,
RR2 Box 700 Inc. and Great Island Investment Company, Inc. (investment
Center Harbor, NH 03226 management). From 1988 to 1993, Mr. Bennett was President of
1/26/29 Bennett Management Company. Mr. Bennett serves on the Board of
each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Ms. Dunn has been Financial Officer of World Wildlife Fund
1250 24th St., NW (nonprofit), since January 1999. From 1991 to 1999, Ms. Dunn was
Washington, DC 20037 Vice President for Finance and Administration and Treasurer of
8/14/51 Radcliffe College (Education). Ms. Dunn serves on the Board of
each Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Mr. Humenuk has been Senior Vice President Administration,
10401 N. Meridian St General Counsel and Secretary of Lone Star Industries Inc.
Suite 400 (cement and ready-mix concrete) since March 2000. From June 1998
Indianapolis, IN 46290 to March 2000 he was Executive Vice President and Chief
4/21/42 Administrative Officer of Philip Services Corp. (ferrous scrap
processing, brokerage and industrial outsourcing services). Mr.
Humenuk was a Partner in the Philadelphia office of the law firm
Dechert Price & Rhoads from July 1976 to June 1998. He was also
formerly a Director of Hofler Corp. (manufacturer of gear
grinding machines). Mr. Humenuk serves on the Board of each
Company in the UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
Philip D. English Mr. English is President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc., a company engaged in the investment
Baltimore, MD 21201 management business. He is also Chairman of the Board of Chektec
8/5/48 Corporation (Drugs) and Cyber Scientific, Inc. (computer mouse
company). Mr. English serves on the Board of each Company in the
UAM Funds Complex.
------------------------------------------------------------------------------------------------------------------------------------
James F. Orr III* President, Chief Executive Officer and Director of UAM since May
One International Place 2000; Chairman and Chief Executive Officer of UNUM Corporation 0 0
Boston, MA 02110 (Insurance) from 1988 to 1999; Trustee of Bates College and the
3/5/43 Committee for Economic Development; Chairman-elect of the Board
of Trustees of the Rockefeller Foundation; Member of The Business
Roundtable, the Harvard Center for Society, and the Health
Advisory Council at the Harvard School of Public Health; Director
of the Nashua Corporation and the National Alliance of Business.
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS
--------------------------------------------------------------------------------
The following table lists the officers of the Company and provides information
regarding their present positions, date of birth, address and their principal
occupations during the past five years. The Company's officers are paid by
UAM, its affiliates or SEI, but not by the Company.
25
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate
Position Compensation From Compensation From
Name, Address, Date of with the Fund as of the Fund Complex as
Birth Fund Principal Occupations During the Past 5 Years October 31, 1999 of October 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James F. Orr III* Board Member President, Chief Executive Officer and Director of 0 0
One International Place President UAM since May 2000; Chairman and Chief Executive
Boston, MA 02110 Officer of UNUM Corporation (Insurance) from 1988 to
3/5/43 1999; Trustee of Bates College and the Committee for
Economic Development; Chairman-elect of the Board of
Trustees of the Rockefeller Foundation; Member of The
Business Roundtable, the Harvard Center for Society,
and the Health Advisory Council at the Harvard School
of Public Health; Director of the Nashua Corporation
and the National Alliance of Business.
-----------------------------------------------------------------------------------------------------------------------------------
Linda T. Gibson Secretary General Counsel and Managing Director of UAM 0 0
211 Congress Street Investment Services, Inc. (financial services);
Boston, MA 02110 Senior Vice President and General Counsel of UAMFSI
7/31/65 (financial services) and UAMFDI (broker-dealer) since
April 2000; Senior Vice President and Secretary of
Signature Financial Group, Inc. (financial services)
and affiliated broker-dealers from 1991 to 2000;
Director and Secretary of Signature Financial Group
Europe, Ltd. (financial services) from 1995 to 2000;
Secretary of the Citigroup Family of Mutual Funds
(mutual funds) from 1996 to 2000; Secretary of the 59
Wall Street Family of Mutual Funds (mutual funds)
from 1996 to 2000.
------------------------------------------------------------------------------------------------------------------------------------
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.
------------------------------------------------------------------------------------------------------------------------------------
Theresa DelVecchio Assistant Secretary of UAMFSI (financial services) since 0 0
211 Congress Street Secretary February 1998; Secretary and Compliance Officer of
Boston, MA 02110 UAMFDI (broker-dealer) since February 2000; Assistant
12/23/63 Vice President of Scudder Kemper Investments
(financial services) from May 1992 to February 1998.
------------------------------------------------------------------------------------------------------------------------------------
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 December 15, 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 10.34% TS&W Equity Institutional Class
51 Madison Ave, RM 117A Portfolio Shares
New York, NY 10010-1603
----------------------------------------------------------------------------------------------------------------------------------
Charles Schwabb & Co. Inc. 8.06% TS&W Equity Institutional Class
Reinvest Account Portfolio Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address of Shareholder Owned Portfolio Class
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lewis Gale Clinic, Inc. 7.20% TS&W Equity Institutional Class
c/o Gil Coblintz Portfolio Shares
1802 Braeburn Drive
Salem, VA 24153-7399
----------------------------------------------------------------------------------------------------------------------------------
Crestar Bank 13.53% 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. 5.75% TS&W Fixed Income Institutional Class
c/o Gil Coblentz Portfolio Shares
1802 Braeburn Drive
Salem, VA 24153-7399
----------------------------------------------------------------------------------------------------------------------------------
Charles Schwab & C., Inc. 8.80% TS&W Fixed Income Institutional Class
Reinvest Account Portfolio Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, Ca 94104-4122
----------------------------------------------------------------------------------------------------------------------------------
Charles Schwabb & Co. Inc. 6.18% TS&W Fixed Income Institutional Class
Reinvest Account Portfolio Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94101-4122
----------------------------------------------------------------------------------------------------------------------------------
American Safety Razor Company 5.24% TS & W International Institutional Class
Attn: Mutual Funds Equity Portfolio Shares
Razor Blade Lane
Verona, VA 24402
----------------------------------------------------------------------------------------------------------------------------------
Riverside Health Care Foundation 12.89% TS & W International Institutional Class
606 Denbigh Blvd, Ste. 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 December 15,
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 the
Funds. The adviser manages and supervises the investment of each Fund'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. United
Asset Management Corporation is a wholly-owned subsidiary of Old Mutual plc, a
United Kingdom based financial services group.
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 Funds of the UAM Funds
Complex.
Portfolio Management
Equity and Fixed Income Portfolios
Investment committees are primarily responsible for the day-today-management
of the 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.
<TABLE>
<CAPTION>
Name & Title Experience
-------------------------------------------------------------------------------------------------------------------------------
<S> <C>
John T Siegel, CFA Princeton University, B.A., 1961; United States Navy, Officer, 1961-1965; University
Managing Director 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. Commerce, 1964; University of Virginia Graduate
Managing Director 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, 1978; Chartered Financial Analyst; Chartered
CFA, CPA Investment Counsel Thompson, Siegel & Walmsley, Inc., 1986-Present.
Senior Vice President
-------------------------------------------------------------------------------------------------------------------------------
Paul A. Ferwerda, CFA Auburn University, B.S. finance, 1979; Duke University, Fuqua School of Business,
Senior Vice President 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 Hill, A.B., 1971; University of Richmond, M.S.,
Vice President 1978; Thompson, Siegel & Walmsley, Inc., 1991- Present.
-------------------------------------------------------------------------------------------------------------------------------
G.D. Rothenberg, CFA University of Virginia, B.A., 1975; UCLA Graduate School of Management, M.B.A., 1979;
Vice President 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. Economics, 1985; Chartered Financial Analyst;
Vice President Chartered Investment Counsel; Thompson, Siegel & Walmsley, Inc., 1986-Present.
-------------------------------------------------------------------------------------------------------------------------------
Alan C. Ashworth,CFA The College of William and Mary, B.B.A Management, 1985; Chartered Financial Analyst;
Vice President Thompson, Siegel & Walmsley, Inc., 1987-Present.
-------------------------------------------------------------------------------------------------------------------------------
Stuart R.Davies, CFA Birmingham Southern College, B.S. Chemistry/Economics, 1985; Virginia Commonwealth
Vice President 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, M.B.A., 1991; Thompson,
Vice President Siegel & Walmsley, Inc., 1994-Present.
-------------------------------------------------------------------------------------------------------------------------------
Brandon H. Harrell, CFA Wake Forest University, B.A. Economics, 1982; George Mason University, M.B.A., 1990;
Vice President Chartered Financial Analyst; Thompson, Siegel & Walmsley, Inc., 1996- Present.
-------------------------------------------------------------------------------------------------------------------------------
Gordon Goodykoontz, CFA Virginia Polytechnic Institute, BA Business, 1962; University of Virginia, MBA, 1966;
Senior Vice President Chartered Financial Analyst; Thompson, Siegel & Walmsley, Inc., 1997- Present.
</TABLE>
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 Company has filed each agreement with the SEC as
part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
28
<PAGE>
. Manages the investment and reinvestment of the Funds' assets;
. Continuously reviews, supervises and administers the investment program
of the Funds; and
. Determines what portion of the Funds' 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 Company, 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 Funds.
Terminating an Investment Advisory Agreement
The Company may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the Funds' 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
Company.
An Investment Advisory Agreement will automatically and immediately
terminate if it is assigned.
Advisory Fees
For its services, the Funds pay its adviser the following annual fees, which
are expressed as a percentage of the average daily net assets of each Fund.
Due to the effect of fee waivers by the adviser, the actual percentage of
average net assets that the Funds pay 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 Funds paid the following in management fees to the
adviser:
<TABLE>
<CAPTION>
Investment Advisory Fees Paid
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Equity Portfolio
2000
-----------------------------------------------------------------------------------------------------------------------------------
1999 $682,600
1998 $740,063
-----------------------------------------------------------------------------------------------------------------------------------
International Equity Portfolio
2000
-----------------------------------------------------------------------------------------------------------------------------------
1999 $1,145,893
1998 $1,187,016
-----------------------------------------------------------------------------------------------------------------------------------
Fixed Income Portfolio
2000
-----------------------------------------------------------------------------------------------------------------------------------
1999 $312,298
1998 $323,555
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
DISTRIBUTOR
-------------------------------------------------------------------------------
UAMFDI serves as the distributor for each Fund of the Company. The Company
offers its shares continuously. While UAMFDI will use its best efforts to
sell shares of the Funds, 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 Company or the
Funds. 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 Funds.
ADMINISTRATIVE SERVICES
-------------------------------------------------------------------------------
Administrator
Pursuant to the Fund Administration Agreement with the Company, UAMFSI
manages, administers and conducts the general business activities of the
Company. 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 Company. UAMFSI, an
affiliate of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI bears all expenses incurred in connection with the performance of its
services under the Fund Administration Agreement. UAMFSI may, at its own
expense, 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 Company. UAMFSI will pay such people for
such employment. The Company will not incur any obligations with respect to
such people. Other expenses incurred in the operation of the Company will be
borne by the Company 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 Funds.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Company stationery and forms.
. Costs of special telephone and data lines and devices.
30
<PAGE>
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Company or 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 Company.
Administration and Transfer Agency Services Fees
Each Fund pays a four-part fee to UAMFSI as follows:
1. An annual fee to UAMFSI for administrative services calculated as
follows:
. $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 Fund at the
following rates:
<TABLE>
Annual Rate
--------------------------------------------------------------------------------
<S> <C>
Equity Portfolio 0.063%
--------------------------------------------------------------------------------
International Equity Portfolio 0.063%
--------------------------------------------------------------------------------
Fixed Income Portfolio 0.043%
--------------------------------------------------------------------------------
</TABLE>
2. An annual fee to UAMFSI for sub-administration and other services, which
UAMFSI pays to SEI, calculated as follows:
. 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 to UAMFSI for transfer agent and dividend-disbursing
services, which UAMFSI pays to DST Systems, Inc. calculated as follows:
. $10,500 for the first operational class; and
. $10,500 for each additional class.
4. An annual base fee to UAMFSI for services as sub-shareholder servicing
agent, which UAMFSI pays to UAMSSC, calculated as follows:
. $7,500 for the first operational class;
. and $2,500 for each additional class.
For the last three fiscal years the Funds paid the following in
administration and sub-administration fees:
<TABLE>
<CAPTION>
Administrators Fee Sub-Administrators Fee Total Administration Fee
----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------
1999 $66,475 $ 87,270 $153,745
1998 $62,586 $ 97,605 $160,191
----------------------------------------------------------------------------------------------------------
International Equity Portfolio
2000
----------------------------------------------------------------------------------------------------------
1999 $81,536 $ 99,204 $180,740
1998 $75,355 $113,008 $188,363
----------------------------------------------------------------------------------------------------------
Fixed Income Portfolio
2000
----------------------------------------------------------------------------------------------------------
1999 $37,612 $79,215 $116,827
1998 $31,772 $82,844 $114,616
----------------------------------------------------------------------------------------------------------
</TABLE>
31
<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 Company.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Company.
CODE OF ETHICS
-------------------------------------------------------------------------------
The Company, its distributor and its investment advisers have adopted a code
of ethics under Rule 17j-1 of the 1940 Act that permits investment personnel
to purchase and sell securities for their personal account.
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 Funds. The Investment Agreement also directs the adviser
to use its best efforts to obtain the best execution with respect to all
transactions for the Funds. 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 Funds 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.
Research services provided by brokers through which the Fund effects
securities transactions may be used by the portfolio's investment adviser in
servicing all of its accounts and not all of these services may be used by
the adviser in connection with the portfolio. Such research include research
reports on particular industries and companies, economic surveys and
analyses, recommendations as to specific securities and other products or
services (e.g., quotation equipment and computer related costs and
expenses), advice concerning the value of securities, the advisability of
investing in, purchasing or selling securities, the availability of
securities or the purchasers or sellers of securities, furnishing analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and performance of accounts, effecting securities
transactions and performing functions incidental thereto (such as clearance
and settlement) and providing lawful and appropriate assistance to the
adviser in the performance of its decision-making responsibilities.
During the fiscal year ended October 31, 2000, the adviser directed $____ of
the portfolio's brokerage transactions in exchange for certain research
services. Commissions paid on those transactions were $____. As of October
31, 2000, the portfolio do not hold any securities of its regular brokers or
dealers, as that term is defined in the 1940 Act.
When allocating brokerage to brokers or effecting principal transactions
with dealers, the investment adviser may also consider the amount of
portfolio shares a broker-dealer has sold and the referral of other clients
by the broker to the adviser, subject to the requirements of best execution
described above. In addition, the portfolio may place trades with qualified
broker-dealers who recommend the portfolio or who act as agents in the
purchase of portfolio shares for their clients.
32
<PAGE>
SIMULTANEOUS TRANSACTIONS
-------------------------------------------------------------------------------
The adviser makes investment decisions for each Fund 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 Funds, in a fair and reasonable
manner. Although there is no specified formula for allocating such
transactions, the Company'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 Funds 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 Funds execute 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 two fiscal years, the portfolios paid the following in brokerage
commissions:
<TABLE>
<CAPTION>
Brokerage Commissions
---------------------------------------------------------------------------
<S> <C>
Equity Portfolio
2000
---------------------------------------------------------------------------
1999 $106,846
---------------------------------------------------------------------------
International Equity Portfolio
2000
---------------------------------------------------------------------------
1999 $203,738
---------------------------------------------------------------------------
Fixed Income Portfolio $ 0
2000
---------------------------------------------------------------------------
1999 $ 0
---------------------------------------------------------------------------
</TABLE>
CAPITAL STOCK AND OTHER SECURITIES
The Company
The Company was organized under the name "The ICM Fund, Inc." as a Maryland
corporation on October 11, 1988. On January 18, 1989, the Company changed its
name to "The Regis Fund, Inc." On October 31, 1995, the Company 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
Company is an diversified, open-end management company. This means that with
respect to 75% of its total assets, the Funds may not invest more than 5% of
its total assets in the securities of any one issuer (other than U.S.
Government Securities).
33
<PAGE>
Description Of Shares And Voting Rights
The Company'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.
Description of Shares
When issued and paid for, the shares of each series and class of the Company
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
Company. 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
Company's governing board.
If the Company is liquidated, the shareholders of each Fund or any class
thereof are entitled to receive the net assets belonging to that Fund, or in
the case of a class, belonging to that Fund and allocable to that class. The
Company will distribute is net assets to its shareholders in proportion to the
number of shares of that Fund or class thereof held by them and recorded on
the books of the Company. The liquidation of any Fund or class thereof may be
authorized at any time by vote of a majority of the members of the governing
board.
The Company will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
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:
. Institutional Shares do not bear any expenses for shareholder servicing and
the distribution of such shares pursuant to a distribution plan or other 12b-
1 plan;
. Institutional Service 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;
and
. Advisor 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. Advisor Shares also
charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income;
. Dividends; and
. NAV to the extent the portfolio has undistributed net income.
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.
34
<PAGE>
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the Funds at NAV
(as of the business day following the record date). Shareholders may change
their dividend and distributions option by writing to the Funds at least three
days before the record date for income dividend or capital gain distribution.
Each Fund send account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
FEDERAL TAXES
The Funds intend 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 it generally will be relieved of federal income
and excise taxes. If the Fund were to fail to make sufficient distributions in
a year, it would be subject to corporate income taxes and/or excise taxes. In
addition, if the shortfall were large enough, the Funds could be disqualified
as a regulated investment company. If a Fund was 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. Moreover, if a Fund was to
fail to make sufficient distributions in a year, the Fund would be subject to
corporate income taxes and/or excise taxes in respect of the shortfall or, if
the shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to distribute with respect to each calendar year at least 98% of
their ordinary taxable income for the calendar year and capital gain net
income (excess of capital gains over capital losses) for the one year period
ending October 31 of such calendar year and 100% of any such amounts that were
not distributed in the prior year. The Funds intend to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Dividends declared in October, November or December of any year that are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by the Fund on December
31 of such year if such dividends are actually paid during January of the
following year.
As of October 31, 2000, the Fund has no capital loss carryovers.
PURCHASE, REDEMPTION AND PRICING OF SHARES
NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of the Funds is equal to the
NAV of its Fund. The Fund calculates its NAV 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 Fund,
plus cash and other assets plus income accrued but not yet received.
Each Fund 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.
35
<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
Funds must receive proper payment for the order by the time it calculates its
NAV on the following business day. Service Agents are responsible to their
customers and the Company 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 the Funds. The Company will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Company 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
Funds' shares.
In-Kind Purchases
At its discretion, the Company may permit shareholders to purchase shares of
Funds the with securities, instead of cash. If the Company 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 Company will
issue shares of the Funds at the NAV of the Fund determined as of the same
time.
The Company will only acquire securities through an in-kind purchase for
investment and not for immediate resale. The Company will only accept in-kind
purchases if the transaction meets the following conditions:
. The securities are eligible investments for the Funds;
. 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 Funds and are delivered to the Funds by
the investor upon receipt from the issuer; and
36
<PAGE>
. Immediately after the transaction is complete, the value of all securities of
the same issuer held by the Funds cannot exceed 5% of the net assets of the
Funds. 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 Funds' investments.
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 Company 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 Company or UAMSSC may be liable for any losses due
to unauthorized or fraudulent telephone instructions if the Company or the
UAMSSC do not employ the procedures described above. Neither the Company 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 Funds to make payment wholly or
partly in cash, the Funds may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the Funds 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 Funds have 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 Funds 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 Funds. 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.
37
<PAGE>
Signature Guarantees
The Company 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 Company will pay for all shares redeemed under proper
procedures within seven days after it received your request. However, the
Company will pay your redemption proceeds earlier as applicable law so
requires.
The Company 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 SEC
as a result of which it is not reasonably practicable for the Fund to dispose
of securities owned by it, or to fairly determine the value of its assets; or
. for such other periods as the SEC may permit.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
The exchange privilege is only available with respect to UAM Funds 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 Company nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
Board 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 other mutual funds in
the UAM Funds Complex and their shareholders.
TRANSFER OF SHARES
--------------------------------------------------------------------------------
Shareholders may transfer shares of the Funds to another person by making a
written request to the Funds. 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 Funds measure 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 Funds calculate their 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 Funds 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 Funds 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, 2000 and the
shorter of the ten-year period ended October 30, 2000 or the period from a
portfolio's inception date through October 31, 2000.
<TABLE>
<CAPTION>
One Year Five Years Shorter of 10 Years 30- Day Inception Date
or Since Inception Yield
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Portfolio 7/17/92
----------------------------------------------------------------------------------------------- --------
International Equity 12/18/92
Portfolio
---------------------------------------------------------------------------------------------------------
Fixed Income Portfolio 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.
Yield is obtained using the following formula:
Yield = 2[((a-b)/(cd)+1)/6/-1]
39
<PAGE>
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 Funds' October 31, 2000 Annual
Report:
. Financial statements for the fiscal year ended October 31, 2000.
. 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 Funds' Annual Reports are incorporated by
reference herein. Shareholders may get copies of the Funds' 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 Funds.
40
<PAGE>
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 Fund.
Board Member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Directors as a group.
Company refers to UAM Funds, Inc.
Independent Board Member refers Board Members that are not Interested Board
Members.
Interested Board Member refers to an "interested person" (as defined by the
1940 Act) of the Company. A Board Member may by an interested person of the
Company because they are affiliated with one of the Company's investment
advisers, United Asset Management Corporation or the Company's principal
underwriter.
Fund refers to a single series of the Company, while Funds refer to all of the
series of the Company.
Governing Board, see Board.
NAV is the net asset value per share of a Fund.
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board."
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.
SEI is SEI Investments Mutual Funds Services, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their Funds.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
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.
41
<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.
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.
42
<PAGE>
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.
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:
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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.
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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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
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.
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.
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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)
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.
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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.
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.
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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)
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.
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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.
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.
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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.
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:
---------------------------------
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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.
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.
53
<PAGE>
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.
54
<PAGE>
PART C
UAM FUNDS, INC.
OTHER INFORMATION
ITEM 23. EXHIBITS
Exhibits previously filed by the Fund are incorporated by reference to such
filings. The following table describes the location of all exhibits. In the
table, the following references are used:
PEA# = Post-Effective Amendment (pertinent numbers for each PEA are included
after "PEA", e.g., PEA #3 means the third PEA under the Securities Act of
1933.)
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated By Reference to
----------- ----------- ----------------------------
Location:
--------
<S> <C> <C>
A.1. Articles of Incorporation PEA#37
A.2. Amendments to Articles of Incorporation PEA#37
A.3. Articles Supplementary PEA#37, PEA#41, PEA#42, PEA#44,
PEA#45, PEA#47, PEA#49; PEA#52
B. 1. Amendment to the By-Laws of UAM Funds, Inc. dated PEA#52, PEA#55 and filed herewith
December 14, 2000
2. Amendment to the By-Laws of UAM Funds, Inc. dated PEA#52, PEA#55 and filed herewith
September 13, 2000
C. Form of Specimen of Securities PEA#52
D. 1. Investment Advisory Agreement for Acadian filed herewith
Emerging Markets Portfolio dated
October 27, 2000
2. Investment Advisory Agreement for C&B Balanced filed herewith
Portfolio dated October 27, 2000
3. Investment Advisory Agreement for C&B Equity filed herewith
Portfolio dated December 15, 2000
4. Investment Advisory Agreement for C&B Equity filed herewith
Portfolio for Taxable Investors dated
October 27, 2000
5. Investment Advisory Agreement for C&B Mid Cap filed herewith
Equity Portfolio dated November 3, 2000
6. Interim Advisory Agreement for DSI Balanced filed herewith
Portfolio dated September 25, 2000
7. Interim Investment Advisory Agreement for filed herewith
DSI Disciplined Value Portfolio dated
September 25, 2000
8. Interim Investment Advisory Agreement for filed herewith
DSI Limited Maturity Bond Portfolio dated
September 25, 2000
9. Interim Investment Advisory Agreement for filed herewith
DSI Money Market Portfolio dated
September 25, 2000
10. Interim Investment Advisory Agreement for filed herewith
DSI Small Cap Portfolio dated
September 25, 2000
11. Investment Advisory Agreement for FMA Small filed herewith
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Company Portfolio dated November 17, 2000
12. Investment Advisory Agreement for filed herewith
ICM Small Company Portfolio dated
November 17, 2000
13. Investment Advisory Agreement for filed herewith
McKee Domestic Equity Portfolio dated
October 27, 2000
14. Investment Advisory Agreement for filed herewith
McKee International Equity Portfolio
dated October 27, 2000
15. Investment Advisory Agreement for filed herewith
McKee Small Cap Equity Portfolio dated
October 27, 2000
16. Investment Advisory Agreement for filed herewith
McKee U. S. Government Portfolio dated
October 27, 2000
17. Investment Advisory Agreement for filed herewith
NWQ Special Equity Portfolio dated
October 27, 2000
18. Investment Advisory Agreement for filed herewith
Rice Hall James Small Cap Portfolio dated
October 27, 2000
19. Investment Advisory Agreement for filed herewith
Rice Hall James Small/Mid Cap Portfolio dated
October 27, 2000
20. Investment Advisory Agreement for filed herewith
Sirach Bond Portfolio dated October 27, 2000
21. Investment Advisory Agreement for filed herewith
Sirach Equity Portfolio dated October 27, 2000
22. Investment Advisory Agreement for filed herewith
Sirach Growth Portfolio dated October 27, 2000
23. Investment Advisory Agreement for filed herewith
Sirach Special Equity Portfolios dated
October 27, 2000
24. Investment Advisory Agreement for filed herewith
Sirach Strategic Balanced Portfolio dated
October 27, 2000
25. Investment Advisory Agreement for filed herewith
Sterling Partners' Balanced Portfolio dated
October 27, 2000
26. Investment Advisory Agreement for filed herewith
Sterling Partners' Equity Portfolio dated
October 27, 2000
27. Investment Advisory Agreement for filed herewith
Sterling Partners' Small Cap Value Portfolio
dated October 27, 2000
28. Investment Advisory Agreement for filed herewith
TS&W Equity Portfolio dated
October 27, 2000
29. Investment Advisory Agreement for filed herewith
TS&W Fixed Income Portfolio dated
October 27, 2000
30. Investment Advisory Agreement for filed herewith
TS&W International Portfolio dated
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
October 27, 2000
E. Distribution Agreement between UAM Fund PEA#49
Distributors, Inc. and UAM Funds, Inc.
F. Bonus and Profit Sharing Contracts Not Applicable
G Global Custody Agreement PEA#44
H. 1. Fund Administration Agreement between UAM Funds, PEA#54
Inc. and UAM Fund Services, Inc.
H.2. Mutual Funds Service Agreement between UAM Fund PEA #56
Services, Inc. and SEI Investments Mutual Funds
Services
I. Opinion of Counsel filed herewith
J. Consent of Independent Auditors filed herewith
K. Omitted Financial Statements Not Applicable
L. Purchase Agreement PEA#52
M.1. Distribution Plan PEA#52
M.2. Form of Selling Dealer Agreement PEA#52
M.3. Shareholder Services Plan PEA#52
M.4. Form of Service Agreement (12b-1 Plan) PEA#52
N. Financial Data Schedules PEA #56
O. Amended and Restated Rule 18f-3 Multiple Class PEA#52
Plan
P. 1. Power of Attorney dated December 14, 2000 for filed herewith
John T. Bennett, Jr.
2. Power of Attorney dated December 14, 2000 for filed herewith
Nancy J. Dunn
3. Power of Attorney dated December 14, 2000 for filed herewith
Philip D. English
4. Power of Attorney dated December 14, 2000 for filed herewith
William A. Humenuk
5. Power of Attorney dated December 14, 2000 for filed herewith
James F. Orr III
Q Code(s) of Ethics to be filed
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Not applicable.
ITEM 25. INDEMNIFICATION
Reference is made to Article NINTH of the Registrant's Articles of
Incorporation, which was filed as Exhibit No. 1 to the Registrant's initial
registration statement, and as Exhibit No., 1 to PEA # 37. Insofar as
indemnification for
<PAGE>
liability arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provision, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefor, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Provisions for indemnification of UAM Fund Services, Inc. are contained in
Section 6 of its Fund Administration Agreement with the Registrant.
Provisions for indemnification of the Registrant's investment advisers are
contained in Section 7 of their respective Investment Advisory Agreements with
the Registrant.
Provisions for indemnification of Registrant's principal underwriter, UAM Fund
Distributors, Inc., are contained in its Distribution Agreement with the
Registrant.
Provisions for indemnification of Registrant's custodian, The Chase Manhattan
Bank, are contained in Section 12 of its Fund Global Custody Agreement with the
Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Adviser" in the Prospectuses
constituting Part A of this Registration Statement and "Investment Adviser" in
Part B of this Registration Statement. The information required by this Item 26
with respect to each director, officer, or partner of each other investment
adviser of the Registrant is incorporated by reference to the Forms ADV filed by
the investment advisers listed below with the Securities and Exchange Commission
pursuant to the Investment Advisers Act of 1940, as amended, under the file
numbers indicated:
Each Investment Adviser is an affiliate of United Asset Management Corporation
("UAM"), a Delaware corporation owning firms engaged primarily in institutional
investment management. UAM is a wholly-owned subsidiary of Old Mutual, plc, a
public limited company based in the United Kingdom.
. Acadian Asset Management Inc. (File No. 801-28078)
. Cooke & Bieler, Inc (File No. 801-210)
. Dewey Square Investors Corporation (File No. 801-34179)
. Fiduciary Management Associates, Inc. (File No. 801-21271)
. Investment Counselors of Maryland, Inc. (File No. 801-8761)
. C.S. McKee & Company, Inc. (File No. 801-08545)
. NWQ Investment Management Company (File No. 801-42159)
. Rice, Hall, James & Associates (File No. 801-30441)
. Sirach Capital Management, Inc. (File No. 801-33477)
. Sterling Capital Management Company (File No. 801-33477)
. Thompson, Siegel & Walmsley, Inc. (File No. 801-6273)
ITEM 27. PRINCIPAL UNDERWRITERS
(a) UAM Fund Distributors, Inc. ("UAMFDI") acts as sole distributor of the
Registrant's shares, and acts as distributor UAM Funds Trust (except ACG
Capital Corporation ("ACG") acts as distributor of the Heitman Real
Estate Portfolio Advisor Class Shares of UAM Funds Trust).
(b) The information required with respect to each Director and officer of
UAMFDI is incorporated by reference to Schedule A of Form BD filed
pursuant to the Securities and Exchange Act of 1934 (SEC File No.
8-41126).
<PAGE>
The information required with respect to each Director and officer of
ACG is incorporated by reference to Schedule A of Form BD filed
pursuant to the Securities and Exchange Act of 1934 (SEC File No.
8-47813).
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act of 1940, as amended, and the rules promulgated thereunder
will be maintained in the physical possession of the Registrant, the
Registrant's Advisers, the Registrant's Administrator (UAM Fund Services, Inc.,
211 Congress Street, 4th Floor, Boston, MA 02110), Sub-Administrative Agent (SEI
Investments Mutual Funds Services, 530 East Swedesford Road, Wayne, PA 19087-
1658), Sub-Shareholder Servicing Agent (UAM Shareholder Services Center, Inc.,
825 Duportail Road, Wayne, PA 19087), the Registrant's Sub-Transfer Agent (DST
Systems, Inc., 210 West 10/th/ Street, Kansas City, MO 64105), and the
Registrant's Custodian Bank (The Chase Manhattan Bank 4 Chase MetroTech Center,
Brooklyn, New York, 11245).
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act of 1940, the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of Boston,
and State of Massachusetts on this 29th day of December, 2000.
UAM FUNDS, INC.
/s/Linda T. Gibson
------------------
Linda T. Gibson
Secretary
Pursuant to the requirements of the Securities Act, this registration statement
has been signed below by the following persons in the capacities indicated on
this 29th day of December, 2000.
*
------------------------------
James F. Orr III, Chairman and
President
*
------------------------------
John T. Bennett, Jr., Director
*
------------------------------
Nancy J. Dunn, Director
*
------------------------------
Philip D. English, Director
*
------------------------------
William A. Humenuk, Director
/s/Linda T. Gibson
-------------------
Linda T. Gibson, Secretary
/s/Linda T. Gibson
------------------
* Linda T. Gibson
(Attorney-in-Fact)
<PAGE>
UAM FUNDS, INC.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
B. 1. Amendment to the By-Laws of UAM Funds, Inc. dated December 14,
2000
2. Amendment to the By-Laws of UAM Funds, Inc. dated September 13,
2000
D. 1. Investment Advisory Agreement for Acadian Emerging Markets
Portfolio dated October 27, 2000
2. Investment Advisory Agreement for C&B Balanced Portfolio dated
October 27, 2000
3. Investment Advisory Agreement for C&B Equity Portfolio dated
December 15, 2000
4. Investment Advisory Agreement for C&B Equity Portfolio for
Taxable Investors dated October 27, 2000
5. Investment Advisory Agreement for C&B Mid Cap Equity Portfolio
dated November 3, 2000
6. Interim Investment Advisory Agreement for DSI Balanced Portfolio
dated September 25, 2000
7. Interim Investment Advisory Agreement for DSI Disciplined Value
Portfolio dated September 25, 2000
8. Interim Investment Advisory Agreement for DSI Limited Maturity
Bond Portfolio dated September 25, 2000
9. DSI Money Market Portfolio dated September 25, 2000
10. Interim Investment Advisory Agreement for DSI Small Cap Portfolio
dated September 25, 2000
11. Investment Advisory Agreement for FMA Small Company Portfolio
dated November 17, 2000
12. Investment Advisory Agreement for ICM Small Company Portfolio
dated November 17, 2000
13. Investment Advisory Agreement for McKee Domestic Equity Portfolio
dated October 27, 2000
14. Investment Advisory Agreement for McKee International Equity
Portfolio dated October 27, 2000
15. Investment Advisory Agreement for
<PAGE>
McKee Small Cap Equity Portfolio dated October 27, 2000
16. Investment Advisory Agreement for McKee U. S. Government
Portfolio dated October 27, 2000
17. Investment Advisory Agreement for NWQ Special Equity Portfolio
dated October 27, 2000
18. Investment Advisory Agreement for Rice Hall James Small Cap
Portfolio dated October 27, 2000
19. Investment Advisory Agreement for Rice Hall James Small/Mid Cap
Portfolio dated October 27, 2000
20. Investment Advisory Agreement for Sirach Bond Portfolio dated
October 27, 2000
21. Investment Advisory Agreement for Sirach Equity Portfolio dated
October 27, 2000
22. Investment Advisory Agreement for Sirach Growth Portfolio dated
October 27, 2000
23. Investment Advisory Agreement for Sirach Special Equity
Portfolios dated October 27, 2000
24. Investment Advisory Agreement for Sirach Strategic Balanced
Portfolio dated October 27, 2000
25. Investment Advisory Agreement for Sterling Partners' Balanced
Portfolio dated October 27, 2000
26. Investment Advisory Agreement for Sterling Partners' Equity
Portfolio dated October 27, 2000
27. Investment Advisory Agreement for Sterling Partners' Small Cap
Value Portfolio dated October 27, 2000
28. Investment Advisory Agreement for TS&W Equity Portfolio dated
October 27, 2000
29. Investment Advisory Agreement for TS&W Fixed Income Portfolio
dated October 27, 2000
30. Investment Advisory Agreement for TS&W International Portfolio
dated October 27, 2000
I. Opinion of Drinker Biddle & Reath LLP
J. Consent of PricewaterhouseCoopers LLP
P. 1. Power of Attorney dated December 14, 2000 for John T. Bennett,
Jr.
2. Power of Attorney dated December 14, 2000 for Nancy J. Dunn
<PAGE>
3. Power of Attorney dated December 14, 2000 for Philip D. English
4. Power of Attorney dated December 14, 2000 for William A. Humenuk
5. Power of Attorney dated December 14, 2000 for James F. Orr III
