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UAM Funds
Funds for the Informed Investor(SM)
The Dwight Capital Preservation Portfolio
Institutional Class Prospectus May 28, 1999
[LOGO OF UAM FUNDS APPEARS HERE]
The Securities and Exchange Commission (SEC) 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.
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Table Of Contents
Portfolio Summary ............................................................ 1
What are the Objectives of the Portfolio?.................................. 1
What are the Principal Investment Strategies of the Portfolio?............. 1
What are the Principal Risks of the Portfolio?............................. 2
What are the Fees and Expenses of the Portfolio?........................... 3
Investing with the UAM Funds ............................................... 4
Buying Shares.............................................................. 4
Redeeming Shares........................................................... 5
Transaction Policies....................................................... 5
Account Policies ........................................................... 9
Small Accounts............................................................. 9
Distributions.............................................................. 9
Federal Taxes.............................................................. 9
Portfolio Details .......................................................... 11
Principal Investments and Risks of the Portfolio........................... 11
Other Investment Practices and Strategies.................................. 14
Year 2000.................................................................. 15
Investment Management...................................................... 16
Shareholder Servicing Arrangements......................................... 17
Additional Classes of Shares............................................... 18
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Portfolio Summary
With certain exceptions, the portfolio offers its shares only to individ-
ual investors who invest in the portfolio through an individual retirement
account ("IRA"), Education IRA, SEP-IRA, SIMPLE IRA, ROTH-IRA or KEOGH
Plan.
WHAT ARE THE OBJECTIVES OF THE PORTFOLIO?
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The portfolio seeks a level of current income higher than that of money
market funds, while attempting to preserve principal and maintain a stable
net asset value per share (NAV). The portfolio cannot guarantee it will
meet its investment objectives. The portfolio may change its investment
objectives without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
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This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio is designed to produce higher returns than a money market
fund, while seeking to maintain a NAV that is considerably more stable
than a typical high-quality fixed-income fund.
Like other high-quality fixed-income funds, the portfolio invests primar-
ily in debt securities that a nationally recognized statistical rating
agency (rating agency), such as Moody's Investors Service or Standard &
Poor's Rating Group, has rated in its top rating category at the time of
purchase. Unlike other fixed-income funds, however, the portfolio seeks to
stabilize its NAV by purchasing wrapper agreements from financial institu-
tions, such as insurance companies and banks (wrap providers). A wrapper
agreement is a contract that obligates the wrap provider to maintain the
adjusted cost basis (book value) of some or all of the assets of the port-
folio. For example, if the portfolio were to sell a security for less than
its book value, the wrap provider may be obligated to pay the portfolio
the difference, and vice versa.
In purchasing a wrapper agreement, the portfolio trades the potential for
capital appreciation and some yield for protection from a decline in the
value of its holdings caused by changes in interest rates.
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WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
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This section summarizes the principal risks associated with investing in
the portfolio. For more information see "PRINCIPAL INVESTMENTS AND RISKS
OF THE PORTFOLIO."
Risks Common to All Mutual Funds
As with all mutual funds, at any time, your investment in the portfolio
may be worth more or less than the price you originally paid for it. You
may lose money by investing in the portfolio because:
. The value of the securities it owns changes, sometimes rapidly and un-
predictably.
. The portfolio is not successful in reaching its goal because of its
strategy or because it did not implement its strategy properly.
. Unforeseen occurrences in the securities markets negatively affect the
portfolio.
Dwight Capital Preservation Portfolio
The portfolio cannot guarantee that the combination of securities and
wrapper agreements will provide a constant NAV or a current rate of return
that is higher than a money market fund.
The portfolio tries to offset changes in the value of its investments and
to maintain a stable NAV by combining its investments in debt securities
with wrapper agreements. However, the portfolio may not be able to main-
tain a stable NAV if:
. A provider of a wrapper agreement defaults on its obligation.
. The portfolio cannot purchase wrapper agreements.
. The portfolio buys wrapper agreements that do not fully offset changes
in its NAV.
If the portfolio's attempts to stabilize its NAV fail, the value of its
investments could fall because:
. Of market conditions and economic and political events.
. Interest rates rise, which tends to cause the value of debt securities
to fall.
. A security's credit rating worsens or its issuer becomes unable to
honor its financial obligations.
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IS THE PORTFOLIO APPROPRIATE FOR ME?
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The portfolio is intended for investors age 59 1/2 or older.
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
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Fees and Expenses of the Portfolio
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
-------------------------------------------------------------------
<S> <C>
Shareholder Fees (Fees Paid Directly From Your Account)
Redemption Fee (as a percentage of amount redeemed) 2.00%#
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Annual Fund Operating Expenses (Expenses That Are Deducted From the
Assets of the Portfolio)
Management Fees 0.50%
-------------------------------------------------------------------
Other Expenses+ 0.60%
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Total Expenses* 1.10%
</TABLE>
# With certain exceptions, shareholders who redeem shares they have held
for less than twelve months will pay a 2.00% redemption fee.
+ Other Expenses are based on estimated amounts for the first fiscal
year of the portfolio. Other Expenses include the fees the portfolio
expects to pay for wrapper agreements.
* Expected Fees and Expenses The portfolio expects that the ratios
stated in the table above will be higher than the expenses you will
actually pay. Due to certain expense limits by the adviser and expense
offsets, you are expected to pay the total operating expenses listed
in the table below during its first fiscal year. The adviser may can-
cel its expense limitation at any time.
<TABLE>
-------------------------
<S> <C>
Expected Expenses 1.00%
</TABLE>
Example
This example can help you to compare the cost of investing in this portfo-
lio to the cost of investing in other mutual funds. The example assumes
you invest $10,000 in the portfolio 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 and that you paid
the total expenses stated above (which do not reflect any expense limita-
tions) 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
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<S> <C> <C>
If you redeem your shares $320 $574
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If you did not redeem your shares, you would pay $112 $350
</TABLE>
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Investing with the UAM Funds
BUYING SHARES
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To open an account To buy more shares
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By Mail Send a check or money Send a check and, if pos-
order and your account sible, the "Invest by
application to the UAM Mail" stub that accompa-
Funds. Make checks pay- nied your statement to the
able to "UAM Funds" UAM Funds. Be sure your
(the UAM Funds will not check identifies clearly
accept third-party your name, account number
checks). and the UAM Fund into
which you want to invest.
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By Wire Call 1-877-826-5465 for Call 1-877-826-5465 to get
an account number and a wire control number and
wire control number and wire your money to the UAM
then send your com- Funds as follows:
pleted account applica-
tion to the UAM Funds.
Wire your money to the
UAM Funds as follows:
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: UAM Fund name/account number/
account name/wire control number
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By Automatic Investment Plan (Via ACH)
You may not open an ac- To set up a plan, mail a
count via ACH. completed application to
the UAM Funds. To cancel
or change a plan, write to
the UAM Funds. Allow up to
15 days to create the plan
and 3 days to cancel or
change it.
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MinimumInvestments $500 $100
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
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REDEEMING SHARES
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By Mail Send a letter signed by all registered parties on the ac-
count to the UAM Funds specifying:
. The name of the UAM Fund.
. The account number.
. The dollar amount or number of shares you wish to
redeem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
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ByTelephone You must first establish the telephone redemption privi-
lege (and, if desired, the wire redemption privilege) by
completing the appropriate sections of the account appli-
cation.
Call 1-877-826-5465 to redeem your shares. Based on your
instructions, the UAM Funds will mail your proceeds to you
or wire them to your bank.
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By Systematic If your account balance is at least $10,000, you may
Withdrawal Plan transfer as little as $100 per month from your UAM Funds
(Via ACH) account to your financial institution.
To participate in this service, you must complete the ap-
propriate sections of the account application and mail it
to the UAM Funds.
TRANSACTION POLICIES
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Who May Invest in the Portfolio
With certain exceptions, the portfolio offers its shares to investors who
wish to invest in the portfolio through one of the following types of in-
dividual retirement accounts:
. Plans described in Section 408 of the Internal Revenue Code (includes
traditional IRAs, SEP-IRAs and SIMPLE IRAs).
. Plans described in Section 408A of the Internal Revenue Code (ROTH-
IRAs).
. Plans described in Section 530 of the Internal Revenue Code (Education
IRAs).
. Plans maintained by sole proprietorships (KEOGH Plans).
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From time to time, the portfolio may allow certain shareholders, including
affiliates of its investment adviser, to buy shares of the portfolio
through an account that does not qualify as one of the IRAs described
above.
Calculating Your Share Price
You may buy or sell shares of the portfolio at a price equal to its net
asset value (NAV) next computed after it receives and accepts your order.
The portfolio calculates its NAV as of the close of trading on the New
York Stock Exchange (NYSE) (generally 4:00 p.m. Eastern Time) each day the
NYSE is open. Therefore, to receive the NAV on any given day, the UAM
Funds must accept your order before the close of trading on the NYSE that
day. Otherwise, you will receive the NAV that is calculated on the close
of trading at the following business day. The UAM Funds are open for busi-
ness on the same days as the NYSE, which is closed on weekends and certain
holidays.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the portfolio through a financial intermedi-
ary (such as a financial planner or adviser). Generally, to buy or sell
shares at the NAV on any given day, your financial intermediary must re-
ceive your order before the close of trading on the NYSE 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.
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.
Calculating NAV
The UAM Funds calculate their NAVs by adding the total value of their as-
sets, subtracting their liabilities and then dividing the result by the
number of shares outstanding. The UAM Funds use market prices to value
their investments. Investments that do not have readily available market
prices, such as wrapper agreements, are valued at fair value, according to
guidelines established by the UAM Funds. The UAM Funds
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may also value securities at fair value when events occur that make estab-
lished valuation methods (such as stock exchange closing prices) unrelia-
ble. The UAM Funds value debt securities that will mature in 60 days or
less at amortized cost, which approximates market value.
In-Kind Transactions
Under certain conditions and at the UAM Fund's discretion, you may pay for
shares with securities instead of cash.
Payment of Redemption Proceeds
The UAM Funds will pay for all shares redeemed within seven days after
they receive a redemption request in proper order. If you redeem shares
that were purchased by check, you will not receive your redemption pro-
ceeds 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 cer-
tified check, bank check or money order.
Redemption Fee
The portfolio will deduct a 2.00% redemption fee from the redemption pro-
ceeds of any shareholder redeeming shares of the portfolio held for less
than twelve months. Shareholders who die, become disabled or have held
their shares continuously for at least twelve months do not pay a redemp-
tion fee.
The portfolio charges the redemption fee to help minimize the impact the
redemption may have on the performance of the portfolio and to offset cer-
tain transaction costs and administrative expenses the portfolio incurs
because of the redemption. The portfolio also charges the redemption fee
to discourage market timing by those shareholders initiating redemptions
to take advantage of short-term interest rate movements.
Signature Guarantee
You must have your signature guaranteed when (1) you want the proceeds
from your redemption sent to a person or address different from that reg-
istered on the account, or (2) you request a transfer of your shares.
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You may obtain a signature guarantee from most banks, savings institu-
tions, securities dealers, national securities exchanges, registered secu-
rities associations, clearing agencies and other guarantor institutions. A
notary public cannot guarantee a signature.
Telephone Transactions
The UAM Funds will employ reasonable procedures to confirm that instruc-
tions communicated by telephone are genuine. The UAM Funds will not be re-
sponsible for any loss, liability, cost or expense for following instruc-
tions received by telephone that they reasonably believe to be genuine.
Rights Reserved by the UAM Funds
Purchases
At any time and without notice, the UAM Funds may:
. Stop offering shares of a portfolio.
. Reject any purchase order.
. Bar an investor engaged in a pattern of excessive trading from buying
shares of any portfolio. (Excessive trading can hurt the performance
of a portfolio by disrupting its management and by increasing its ex-
penses.)
Redemptions
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 sus-
pend your right to redeem if:
. Trading on the NYSE is restricted.
. The SEC allows the UAM Funds to delay redemptions.
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Account Policies
SMALL ACCOUNTS
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The UAM Funds may redeem your shares without your permission if the value
of your account falls below $250. This provision does not apply:
. To retirement accounts and certain other accounts.
. When the value of your account falls below the required minimum be-
cause of market fluctuations.
The UAM Funds will notify you before liquidating your account and allow
you 60 days to increase the value of your account.
DISTRIBUTIONS
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Normally, the portfolio declares its net investment income daily and pays
it monthly. In addition, the portfolio distributes its net capital gains
once a year. The UAM Funds will automatically reinvest dividends and dis-
tributions in additional shares of the portfolio, unless you elect on your
account application to receive them in cash.
To maintain a stable NAV, the portfolio may have to declare and pay divi-
dends in amounts that are not equal to the amount of net investment income
it actually earns. This may cause the portfolio to take some or all of the
following actions:
. If the portfolio distributes more money than it actually earned
through its investments, it may have to make a distribution that may
be considered a return of capital.
. If the income the portfolio receives exceeds the amount of dividends
distributed, the portfolio may have to distribute that excess income
to shareholders and declare a reverse split of its shares.
The portfolio may split its shares when it distributes its net capital
gains. Share splits or reverse share splits will cause the number of
shares owned by shareholders to increase or decrease while allowing the
NAV of the portfolio to remain stable.
FEDERAL TAXES
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The following is a summary of the federal income tax consequences of in-
vesting in the portfolio. You may also have to pay state and local taxes
on
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your investment. You should always consult your tax advisor for specific
guidance regarding the tax effect of your investment in the UAM Funds.
Taxes on Distributions
The distributions of the portfolio will generally be taxable to sharehold-
ers as ordinary income or capital gains (which may be taxable at different
rates depending on the length of time the portfolio held the relevant as-
sets). You will be subject to income tax on these distributions regardless
of whether they are paid in cash or reinvested in additional shares. Once
a year the 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 con-
stitutes a return of your investment. This is known as "buying into a div-
idend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolio expects to make a distribution to shareholders.
Taxes on Redemptions
If the portfolio fails to maintain a stable NAV, when you redeem shares of
the portfolio 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 and the amount you receive for them. To aid in comput-
ing your tax basis, you should keep your account statements for the peri-
ods during which you held shares.
The one major exception to these tax principles is that distributions on,
and sales and redemptions of, shares held in an IRA (or other tax-
qualified plan) may not be currently taxable, but they may be taxable in
the future.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
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Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
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The following briefly describes the principal investment strategies that
the portfolio may employ in seeking its objectives. For more information
concerning these investment practices and their associated risks, please
read the "PORTFOLIO SUMMARY" and the SAI. The portfolio may change these
strategies without shareholder approval.
The portfolio invests primarily in debt securities that a nationally rec-
ognized statistical rating agency (rating agency), such as Moody's Invest-
ors Service or Standard & Poor's Rating Group, has rated in its top rating
category at the time of purchase. The portfolio may also invest in:
. Liquid short-term investments, such as money market instruments, that
a rating agency has rated in one of its top two short-term rating cat-
egories at the time of purchase.
. Other investments, including commingled pools of debt securities.
The average duration of the portfolio will normally range from 1.5 to 4.0
years. The portfolio expects its dollar weighted average maturity will be
six years or less.
The portfolio seeks to stabilize its NAV by purchasing wrapper agreements
from financial institutions, such as insurance companies and banks (wrap
providers). The portfolio will buy wrapper agreements from wrap providers
that a rating agency has rated in one of its top two rating categories at
the time of purchase. The portfolio expects to purchase enough wrapper
agreements to cover all of its debt securities, but not its cash, cash
equivalents or other liquid short-term investments.
Comparison to Money Market Funds and Other Fixed Income Funds
While not fixed at $1.00 per share like a money market fund, the wrapper
agreements are likely to cause the net asset value of the portfolio to be
considerably more stable than a typical high-quality fixed-income fund. A
money market fund will generally have a shorter average maturity than the
portfolio and its yield will tend to more closely track the direction of
current market rates than the yield of the portfolio. Over the long-term,
however, the adviser believes the portfolio will offset those differences
by producing higher returns than a money market fund. The
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portfolio cannot, however, guarantee that the combination of securities
and wrapper agreements will provide a constant NAV or a current rate of
return that is higher than a money market mutual fund.
Debt Securities
A debt security is an interest bearing security that corporations and gov-
ernments 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 (the date a debt security is
due and payable). The portfolio may invest in debt securities 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 esti-
mating the change in price of a debt security for a 1% change in its
yield. For example, a duration of five 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 debt
security 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 under-
lying 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 portfolio by
shortening or lengthening its average maturity and, thus, changing its ef-
fective duration. The unexpected timing of mortgage backed and asset-
backed prepayments caused by changes in interest rates may also cause the
portfolio to reinvest its assets at lower rates, reducing the yield of the
portfolio.
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 un-
able to honor its financial obligations, the security may lose some or all
of its value.
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Wrapper Agreements
A wrapper agreement obligates the wrap provider to maintain the book value
of some or all of the portfolio's assets (covered assets). Under a typical
wrapper agreement, if the portfolio sells a covered asset for less than
book value, the wrap provider will pay the portfolio the difference. If
the portfolio sells a security for more than its book value, the portfolio
will pay the wrap provider the difference. The book value of the covered
assets is their purchase price:
. Plus interest on the covered assets at a rate specified in the wrapper
agreement (crediting rate).
. Less an adjustment to reflect any defaulted securities.
The portfolio and the wrapper provider calculate the crediting rate used
in computing book value according to a formula specified in the wrapper
agreement. Usually, the crediting rate is
. The actual interest earned on the covered assets, or an index-based
approximation of the interest earned on the covered assets.
. Plus or minus an adjustment for an amount receivable from or payable
to the wrapper provider based on fluctuations in the market value of
the covered assets.
The portfolio anticipates that the value of the wrapper agreements will
move in the opposite direction from the value of the covered assets. When
the value of the covered assets is less than their book value, the portfo-
lio will treat the difference as an asset. Similarly, when the value of
the covered assets is more than their book value, the excess will be a li-
ability of the portfolio. Normally, the portfolio expects the sum of the
total value of its wrapper agreements plus the total value of all of its
covered assets to equal the book value of its covered assets.
The terms of the wrapper agreements vary concerning when payments must ac-
tually be made between the portfolio and the wrap provider. In some cases,
payments may be due upon disposition of the covered assets. Other wrapper
agreements only provide for settlement when the wrapper agreement termi-
nates or the portfolio sells all of the covered assets.
Risks of Wrapper Agreements
The crediting rate will generally reflect movements in prevailing interest
rates, though, it may at any time be different from these rates or the ac-
tual interest income earned on the covered assets. The costs the portfo-
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lio incurs when buying wrapper agreements may reduce its return as com-
pared to a direct investment in the covered assets. Consequently, the
portfolio may not perform as well as other high-quality fixed-income funds
of comparable duration.
The portfolio may have to maintain a specified percentage of its total as-
sets in short-term investments (liquidity reserve). This may result in a
lower return for the portfolio than if it had invested in longer-term debt
securities.
The following are some of the factors that may cause the value of your
shares to decline:
. The wrap provider defaults or has its credit rating lowered.
. An issuer of a security may default on payments of principal or inter-
est or have its credit rating downgraded, which may require the port-
folio to sell covered assets quickly and at prices that may not fully
reflect their current value. Wrap providers do not typically assume
the credit risk associated with the issuer of any covered assets. In
addition, downgrades below investment-grade and defaults by the issuer
of covered assets usually will cause the wrap provider to remove such
assets from the coverage of a wrapper agreement.
. The portfolio might not be able to replace existing wrapper agreements
with other suitable wrapper agreement if (1) they mature or terminate
or (2) the wrap provider defaults.
. The portfolio may be unable to obtain suitable wrapper agreements or
may elect not to cover some or all of its assets with wrapper agree-
ments. This could occur if wrapper agreements are not available or if
the adviser believes that the terms of available wrapper agreements
are unfavorable.
There is no active trading market for wrapper agreements and the portfolio
does not expect one to develop; therefore, the portfolio will consider
wrapper agreements illiquid. The portfolio may invest up to 15% of its net
assets in illiquid securities.
OTHER INVESTMENT PRACTICES AND STRATEGIES
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As described below, the portfolio may use derivatives and may deviate from
its investment strategy from time to time. In addition, the portfolio may
employ investment strategies that are not described in this prospec-
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tus, such as repurchase agreements, when-issued and forward commitment
transactions, lending of securities, borrowing and other techniques. For
more information concerning the risks associated with these investment
practices, you should read the SAI.
Derivatives
The portfolio may use options, futures and swaps (types of derivatives).
Derivatives are often more volatile than other investments and may magnify
a portfolio's gains or losses. A portfolio 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.
Portfolio Turnover
The portfolio may buy and sell investments relatively often and estimates
that its annual portfolio turnover rate will not exceed 200%. Such a
strategy often involves higher expenses, including brokerage commissions,
and may increase the amount of capital gains, particularly short-term
gains realized by the portfolio. Shareholders must pay tax on such capital
gains.
Short-Term Investing
At times, the adviser may decide to invest up to 100% of the assets of the
portfolio in a variety of high-quality short-term 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 posi-
tion to reduce changes in the value of the shares of the portfolio that
may result from adverse market, economic, political or other developments.
When the adviser pursues a temporary defensive strategy, the portfolio may
not profit from favorable developments that it would have otherwise prof-
ited from if it were pursuing its normal strategies. Likewise, these
strategies may prevent the portfolio from achieving its stated objectives.
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YEAR 2000
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Many computer programs in use today cannot distinguish the year 2000 from
the year 1900 because of the way they encode and calculate dates. Conse-
quently, these programs may not be able to perform necessary functions and
could disrupt the operations of the UAM Funds or financial markets in gen-
eral. The year 2000 issue affects all companies and organizations, includ-
ing those that provide services to the UAM Funds and those in which the
UAM Funds invest.
The UAM Funds and their advisers, administrator, distributor and transfer
agent are taking steps they believe are reasonably necessary to address
any portfolio-related year 2000-related computer problems. They are ac-
tively working on necessary changes to their own computer systems to pre-
pare for the year 2000 and expect that their systems will be adapted be-
fore that date. They are also requesting information on each service prov-
ider's state of readiness and contingency plan. However, at this time the
degree to which the year 2000 issue will affect the UAM Funds' investments
or operations cannot be predicted. Any negative consequences could ad-
versely affect your investment in the UAM Funds.
INVESTMENT MANAGEMENT
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Investment Adviser
Dwight Asset Management Company, a Delaware corporation located at 125
College Street, Burlington, Vermont 05401, is the investment adviser to
the portfolio. The adviser manages and supervises the investment of the
portfolio's assets on a discretionary basis. The adviser, an affiliate of
United Asset Management Corporation, has provided investment management
services to corporations, pension and profit-sharing plans, 401(k) and
thrift plans since 1983.
For its services, the portfolio pays the adviser a fee of 0.50% of its av-
erage net assets. In addition, the adviser has voluntarily agreed to limit
the total annual fund operating expenses of the portfolio to 1.00%. To
maintain this expense limit, the adviser may waive a portion of its man-
agement fee and/or reimburse certain expenses of the portfolio. The ad-
viser intends to continue this expense limitation until further notice.
Portfolio Managers
A team of investment professionals of the adviser is primarily responsi-
bility for the day-to-day management of the portfolio.
16
<PAGE>
Adviser's Historical Performance
The adviser manages accounts of debt securities that have substantially
similar investment objectives as the portfolio. The adviser manages these
accounts using techniques and strategies substantially similar, though not
always identical, to those used to manage the portfolio. A composite of
the performance of all of these accounts is listed below. The performance
data for the managed accounts reflects deductions of all fees and ex-
penses. All fees and expenses of the separate accounts were less than the
operating expenses of the portfolio. If the performance of the managed ac-
counts was adjusted to reflect fees and expenses of the portfolio, the
composite's performance would have been lower.
The adviser calculated its performance according to the method used by the
Association for Investment Management and Research. Had the adviser calcu-
lated its performance using the SEC's method, its results might have dif-
fered.
The separately managed accounts are not subject to investment limitations,
diversification requirements, and other restrictions imposed by the In-
vestment Company Act of 1940 and the Internal Revenue Code. If they were,
their returns might have been lower. The performance of these separate ac-
counts is not intended to predict or suggest the performance of the port-
folio.
<TABLE>
<CAPTION>
Dwight Asset
Management Company
All Funds Ryan 5 Year
Composite* GIC Master Index
----------------------------------------------------
<S> <C> <C>
Calendar Years
1998 6.94% 6.57%
----------------------------------------------------
1997 7.11% 6.58%
----------------------------------------------------
1996 7.28% 6.73%
----------------------------------------------------
1995 7.63% 7.19%
----------------------------------------------------
1994 8.10% 7.52%
----------------------------------------------------
1993 8.69% 8.15%
----------------------------------------------------
1992 9.37% 8.70%
----------------------------------------------------
Average Annualized Return For
Various Periods Ended 3/31/99
1-year 6.85% 6.59%
----------------------------------------------------
3-years 7.05% 6.61%
----------------------------------------------------
5-years 7.33% 6.86%
----------------------------------------------------
10-years 8.65% 7.83%
</TABLE>
* All returns are dollar weighted, and are net of fees and expenses. Re-
turns are net of fees, which are based on a dollar weighted average of
0.10% as of 12/31/98.
17
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Brokers, dealers, banks, trust companies and other financial representa-
tives may receive compensation from the UAM Funds or their service provid-
ers for providing a variety of services. This section briefly describes
how 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 attribut-
able 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 di-
rectly 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 represent-
atives. Periodically, the board of the UAM Funds reviews these arrange-
ments to ensure that the fees paid are appropriate to the services per-
formed. 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.
The adviser and its affiliates may, at their own expense, pay financial
representatives for distribution and marketing services performed with re-
spect to the UAM Funds.
The adviser may pay its affiliated companies distribution and marketing
services performed with respect to the UAM Funds.
ADDITIONAL CLASSES OF SHARES
- -------------------------------------------------------------------------------
The portfolio also offers an Institutional Service Class shares, which pay
marketing or shareholder servicing fees.
18
<PAGE>
Dwight Capital Preservation Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
How to Get More Information
Investors can receive free copies of these materials, request other infor-
mation about the UAM Funds and make shareholder inquiries by writing to or
calling:
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(toll free) 1-877-UAM-LINK (826-5465)
www.uam.com
For a fee, you can get copies of the reports of the portfolio and SAI by
writing to the SEC's Public Reference Section, Washington, D.C. 20459-
6009, or by calling the SEC at 1-800-SEC-0330. You can get copies of this
information for free on the SEC's Internet site at http://www.sec.gov.
The portfolio's Investment Company Act of 1940 file number is 811-8544.
[UAM LOGO APPEARS HERE]
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Dwight Capital Preservation Portfolio
Institutional Class Shares
Institutional Service Class Shares
Statement of Additional Information
May 28, 1999
This statement of additional information is not a prospectus. However, you
should read it in conjunction with the Institutional Class and Institutional
Service Class prospectuses of the portfolio dated July 30, 1999, as supplemented
form time to time. You may obtain the portfolio's prospectuses by contacting the
UAM Funds at the address listed above.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Definitions................................................................. 1
The Fund.................................................................... 1
Description of the Portfolio and Its Investments and Risks.................. 1
Debt Securities........................................................... 1
Derivatives............................................................... 8
Investment Companies......................................................14
Repurchase Agreements.....................................................14
Restricted Securities.....................................................15
Securities Lending........................................................15
When-Issued, Forward Commitment And Delayed Delivery Transactions.........15
Wrapper Agreements........................................................16
Investment Policies.......................................................19
Management Of The Fund......................................................20
Investment Advisory and Other Services......................................22
Investment Adviser........................................................22
Distributor...............................................................23
Administrative Services...................................................23
Custodian.................................................................25
Independent Public Accountant.............................................25
Service And Distribution Plans............................................25
Brokerage Allocation and Other Practices....................................27
Selection of Brokers......................................................27
Simultaneous Transactions.................................................27
Brokerage Commissions.....................................................28
Capital Stock and Other Securities..........................................28
Description Of Shares And Voting Rights...................................28
Dividends And Capital Gains Distributions...................................29
Purchase Redemption and Pricing of Shares...................................29
Net Asset Value Per Share.................................................29
Purchase of Shares........................................................30
Redemption of Shares......................................................31
Transfer Of Shares........................................................32
Valuation of Shares.......................................................32
Performance Calculations....................................................33
Total Return..............................................................33
Yield.....................................................................33
Comparisons...............................................................34
Taxes.....................................................................34
Moody's Investors Service, Inc.............................................. 1
Preferred Stock Ratings................................................... 1
Debt Ratings - Taxable Debt & Deposits Globally........................... 1
Short-Term Prime Rating System - Taxable Debt & Deposits Globally......... 2
Standard & Poor's Ratings Services.......................................... 3
Preferred Stock Ratings................................................... 3
Long-Term Issue Credit Ratings............................................ 3
Short-Term Issue Credit Ratings........................................... 4
Duff & Phelps Credit Rating Co.............................................. 5
Long-Term Debt and Preferred Stock........................................ 5
Short-Term Debt........................................................... 6
Fitch IBCA Ratings.......................................................... 6
International Long-Term Credit Ratings.................................... 6
</TABLE>
<PAGE>
Definitions
The "Fund" is UAM Funds Trust.
The term "adviser" means Dwight Asset Management Company, the portfolio's
investment adviser.
UAM is United Asset Management Corporation.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-shareholder-
servicing agent.
SEI is SEI Investments, the Fund's sub-administrator.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds, Inc. II, UAM Funds
Trust, UAM Funds Trust II and all of their portfolios.
The term "the portfolio" is used to refer to Dwight Capital Preservation
Portfolio, while "portfolio" or "portfolios" refers to some or all portfolios
of the UAM Funds Complex.
The terms "board" and "governing board" refer to the Fund's Board of Directors
as a group, while "board member" refers to a single member of the board.
"1940 Act" refers to the Investment Company Act of 1940, as amended.
All other defined terms, which are not otherwise defined in this SAI, have the
same meaning in the SAI as they do in the prospectus of Dwight Capital
Preservation Portfolio.
The Fund
The Fund was organized under the name The Regis Fund II as a Delaware business
trust on May 18, 1994. On October 31, 1995, the name of the Fund was changed
to "UAM Funds Trust." The Fund's principal executive office is located at One
International Place, Boston, MA 02110; shareholders should direct all
correspondence to the address listed on the cover of this SAI.
The Fund is registered as an open-end, management investment company under the
1940 Act. The portfolio is a diversified series of the Fund, which means that
with respect to 75% of its total assets, the portfolio may not invest more
than 5% of its total assets in the securities of any one issuer (except U.S.
government securities). The remaining 25% of its total assets are not subject
to this restriction. To the extent the portfolio invests a significant
portion of its assets in the securities of a particular issuer, it will be
subject to an increased risk of loss if the market value of such issuer's
securities declines.
Description of the Portfolio and Its Investments and Risks
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. Debt securities may include, among other things, all
types of bills, notes, bonds, mortgage-backed securities or asset-backed
securities.
1
<PAGE>
Types of Debt Securities
U.S. Government Securities
U.S. government securities are securities that the United States 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 and Other Asset-Backed Securities." This SAI discusses
mortgage-backed treasury and agency securities in detail in the section called
"Mortgage-Backed 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 United States
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 United States Treasury.
. By the discretionary authority of the United States government to buy the
obligations of the agency
. By the credit of the sponsoring agency.
While U.S. government securities are guaranteed as to principal and interest,
their market value is not guaranteed. U.S. government securities are subject
to the same interest rate and credit risks as other fixed income securities.
However, since U.S. government securities are of the highest quality, the
credit risk is minimal. The U.S. government does not guarantee the net asset
value of the assets of the portfolio.
Corporate Bonds
Corporations issue bonds and notes to raise money for working capital or for
capital expenditures such as plant construction, equipment purchases and
expansion. In return for the money loaned to the corporation by investors,
the corporation promises to pay investors interest, and repay the principal
amount of the bond or note.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgage loans that
various governmental, government-related and private organizations assemble as
securities for sale to investors. Unlike most debt securities, which pay
interest periodically and repay principal maturity 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 its stated.
Governmental entities, private insurers and the mortgage poolers may insure or
guaranty the timely payment of interest and principal of these pools through
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The adviser will consider
such insurance and guarantees and the creditworthiness of the issuers thereof
in determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or guarantors will
not meet their obligations under the insurance policies or guarantee
arrangements.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Government National Mortgage Association (GNMA)
GNMA is the principal governmental guarantor of mortgage-related securities.
GNMA is a wholly owned corporation of the U.S. government and it falls within
the Department of Housing and Urban Development. Securities issued by GNMA are
treasury securities, which means the faith and credit of the U.S. government
backs them. GNMA guarantees the timely payment of principal and interest on
securities issued by
2
<PAGE>
institutions approved by GNMA and backed by pools of FHA-insured or VA-
guaranteed mortgages. GNMA does not guarantee the market value or yield of
mortgage-backed securities or the value of portfolio shares. To buy GNMA
securities, the portfolio may have to pay a premium over the maturity value of
the underlying mortgages, which the portfolio may lose if prepayment occurs.
Federal National Mortgage Association (FNMA)
FNMA is a government-sponsored corporation owned entirely by private
stockholders. FNMA is regulated by the Secretary of Housing and Urban
development. FNMA purchases conventional mortgages from a list of approved
sellers and service providers, including state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Securities issued by FNMA are agency securities,
which means FNMA, but not the U.S. government, guarantees their timely payment
of principal and interest.
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 from its national portfolio. Like FNMA, FHLMC
guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. In addition to
guaranteeing the mortgage-related security, such issuers may service and/or
have originated the underlying mortgage loans. Pools created by these issuers
generally offer a higher rate of interest than pools created by GNMA, FNMA &
FHLMC because they are not guaranteed by a government agency.
Risks of Mortgage-Backed Securities
Yield characteristics of mortgage-backed securities differ from those of
traditional debt securities in a variety of ways, the most significant of
which are that mortgage-backed securities:
. Their payments of interest and principal are more frequent (usually
monthly).
. They usually have adjustable interest rates.
. The may pay off their entire principal substantially earlier than their
final distribution dates so that the price of the security will generally
decline when interest rates rise.
In addition to risks associated with changes in interest rates described in
"Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. If the prepayment
rates increase, the portfolio may have to reinvest its principal at a rate of
interest that is lower than the rate on existing mortgage-backed securities.
Other Asset-Backed Securities
These securities are interests in pools of a broad range of assets other than
mortgage, 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
3
<PAGE>
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 rated asset-backed securities. Due to
the quantity of vehicles involved and requirements under state laws, asset-
backed securities backed by automobile receivables may not have a proper
security interest in all of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the
pool ("credit support"). Delinquency or loss more than that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
The portfolio may also invest in residual interests in asset-backed
securities, which is the excess cash flow remaining after making required
payments on the securities and paying related administrative expenses. The
amount of residual cash flow resulting from a particular issue of asset-backed
securities depends in part on the characteristics of the underlying assets,
the coupon rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying
assets.
Collateralized Mortgage Obligations (CMOs)
CMOs are hybrids between mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, CMOs usually pay interest and prepaid principal
semiannually. While whole mortgage loans may collateralize CMOs, portfolios of
mortgage-backed securities guaranteed by GNMA, FHLMC, or FNMA, and their
income streams more typically collateralize them.
A REMIC is a CMO that qualifies for special tax treatment under the Internal
Revenue Code of 1986, as amended, and invests in certain mortgages primarily
secured by interests in real property and other permitted investments.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Each class of CMO or REMIC certificate, often referred to as a
"tranche," is issued at a specific interest rate and must be fully retired by
its final distribution date. Generally, all classes of CMOs or REMIC
certificates pay or accrue interest monthly. Investing in the lowest tranche
of CMOs and REMIC certificates involves risks similar to those associated with
investing in equity securities.
Short-Term Investments
To earn a return on uninvested assets, meet anticipated redemptions, or for
temporary defensive purposes, a portfolio may invest a portion of its assets
in
. The short-term investments described below.
. U.S. government securities
. Investment-grade corporate debt securities. Unless otherwise specified, a
short-term debt security has a maturity of one year or less.
Bank Obligations
The portfolio will only invest in a security issued by a commercial bank if
the bank:
. Has total assets of at least $1 billion, or the equivalent in other
currencies;
. Is a U.S. bank and a member of the Federal Deposit Insurance Corporation;
and
4
<PAGE>
. Is a foreign branch of a U.S. bank and the adviser believes the security is
of an investment quality comparable with other debt securities that the
portfolio may purchase.
Time Deposits
Time deposits are non-negotiable deposits, such as savings accounts or
certificates of deposit, held by a financial institution for a fixed term with
the understanding that the depositor can withdraw its money only by giving
notice to the institution. However, there may be early withdrawal penalties
depending upon market conditions and the remaining maturity of the obligation.
The portfolio may only purchase time deposits maturing from two business days
through seven calendar days.
Certificates of Deposit
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or savings and loan association for a definite
period of time and earning a specified return.
Banker's Acceptance
A banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods).
Commercial Paper
Commercial paper is a short-term obligation with a maturity ranging from 1 to
270 days issued by banks, corporations and other borrowers. Such investments are
unsecured and usually discounted. A portfolio may invest in commercial paper
rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, or, if not rated,
issued by a corporation having an outstanding unsecured debt issue rated A or
better by Moody's or by S&P. See Appendix A for a description of commercial
paper ratings.
Yankee Bonds
Yankee bonds are dollar-denominated bonds issued inside the United States by
foreign entities. Investment in these securities involve certain risks which are
not typically associated with investing in domestic securities. See "FOREIGN
SECURITIES".
Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are sold at
a discount from their face value. When held to maturity, their entire income,
which consists of accretion of discount, comes from the difference between the
issue price and their value at maturity. The amount of the discount rate varies
depending on factors including the time remaining until maturity, prevailing
interest rates, the security's liquidity and the issuer's credit quality. The
market value of zero coupon securities may exhibit greater price volatility than
ordinary debt securities because a stripped security will have a longer duration
than an ordinary debt security with the same maturity. The portfolio's
investments in pay-in-kind, delayed and zero coupon bonds may require it to sell
certain of its portfolio securities to generate sufficient cash to satisfy
certain income distribution requirements.
These securities may include U.S. 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 U.S. 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
5
<PAGE>
obligations acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. Under a Federal Reserve program
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities," the portfolio can record its beneficial ownership of the coupon
or corpus directly in the book-entry record-keeping system.
Terms to Understand
Maturity
Every debt security has a stated maturity date when the issuer must repay the
amount it borrowed (principal) from investors. Some debt securities, however,
are callable, meaning the issuer can repay the principal earlier, on or after
specified dates (call dates). Debt securities are most likely to be called
when interest rates are falling because the issuer can refinance at a lower
rate, similar to a homeowner refinancing a mortgage. The effective maturity
of a debt security is usually its nearest call date.
A portfolio that invests in debt securities has no real maturity. Instead, it
calculates its weighted average maturity. This number is an average of the
stated maturity of each debt securities held by the portfolio, with the
maturity of each security weighted by the percentage of the assets of the
portfolio it represents.
Duration
Duration is a calculation that seeks to measure the price sensitivity of a
debt security, or 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
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or
6
<PAGE>
lengthen the average maturity of the portfolio. If left unattended, drifts in
the average maturity of the portfolio can have the unintended effect of
increasing or reducing the effective duration of the portfolio, which may
adversely affect the expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause a portfolio's average maturity to lengthen
unexpectedly due to a drop in mortgage prepayments. This would increase the
sensitivity of the portfolio to rising rates and its potential for price
declines. Extending the average life of a mortgage-backed security increases
the risk of depreciation due to future increases in market interest rates. For
these reasons, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" interest rates.
Credit Rating
Coupon interest is offered to investors of fixed income securities as
compensation for assuming risk, although short-term U.S. treasury securities,
such as 3 month treasury bills, are considered "risk free." Corporate
securities offer higher yields than U.S. treasuries 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 U.S. treasuries.
Changes in investor confidence regarding the certainty of interest and
principal payments of a fixed income corporate security will result in an
adjustment to this "risk premium." Since an issuer's outstanding debt carries
a fixed coupon, adjustments to the risk premium must occur in the price, which
effects the yield to maturity of the bond. If an issuer defaults or becomes
unable to honor its financial obligations, the bond may lose some or all of
its value.
A security rated within the four highest rating categories by a rating agency
is called investment-grade because its issuer is more likely to pay interest
and repay principal than an issuer of a lower rated bond. Adverse economic
conditions or changing circumstances, however, may weaken the capacity of the
issuer to pay interest and repay principal. If a security is not rated or is
rated under a different system, the adviser may determine that it is of
investment-grade. The adviser may retain securities that are downgraded, if
it believes that keeping those securities is warranted.
Debt securities rated below investment-grade (junk bonds) are highly
speculative securities that are usually issued by smaller, less credit worthy
and/or highly leveraged (indebted) companies. A corporation may issue a junk
bond because of a corporate restructuring or other similar event. Compared
with investment-grade bonds, junk bonds carry a greater degree of risk and are
less likely to make payments of interest and principal. Market developments
and the financial and business condition of the corporation issuing these
securities influences their price and liquidity more than changes in interest
rates, when compared to investment-grade debt securities. Insufficient
liquidity in the junk bond market may make it more difficult to dispose of
junk bonds and may cause the portfolio to experience sudden and substantial
price declines. A lack of reliable, objective data or market quotations may
make it more difficult to value junk bonds accurately.
Rating agencies are organizations that assign ratings to securities based
primarily on the rating agency's assessment of the issuer's financial
strength. The portfolios currently use ratings compiled by Standard and
Poor's Ratings Services, Duff & Phelps Rating Co., Fitch IBCA, Inc. and,
Moody's Investor Services. Credit ratings are only an agency's opinion, not an
absolute standard of quality, and they do not reflect an evaluation of market
risk. Appendix A contains further information concerning the ratings of
certain rating agencies and their significance.
The adviser may use ratings produced by ratings agencies as guidelines to
determine the rating of a security at the time the portfolio buys it. A rating
agency may change its credit ratings at any time. The adviser monitors the
rating of the security and will take appropriate actions if a rating agency
reduces the security's rating. The
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portfolio is not obligated to dispose of securities whose issuers subsequently
are in default or which are downgraded below the above-stated ratings.
DERIVATIVES
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Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. The portfolio tries to
minimize its loss by investing in derivatives to protect them from broad
fluctuations in market prices, interest rates or foreign currency exchange
rates. Investing in derivatives for these purposes is known as "hedging." When
hedging is successful, the portfolio will have offset any depreciation in the
value of its portfolio securities by the appreciation in the value of the
derivative position. Although techniques other than the sale and purchase of
derivatives could be used to control the exposure of the portfolio to market
fluctuations, the use of derivatives may be a more effective means of hedging
this exposure.
Types of Derivatives
Futures
A futures contract is an agreement between two parties whereby one party sells
and the other party agrees to buy a specified amount of a financial instrument
at an agreed upon price and time. The financial instrument underlying the
contract may be a stock, stock index, bond, bond index, interest rate, foreign
exchange rate or other similar instrument. Agreeing to buy the underlying
financial information is called buying a futures contract or taking a long
position in the contract. Likewise, agreeing to sell the underlying financial
instrument is called selling a futures contract or taking a short position in
the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading
and regulated by the Commodity Futures Trading Commission, a federal agency.
These contract markets standardize the terms, including the maturity date and
underlying financial instrument, of all futures contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit "initial margin" with a futures broker, known as a futures commission
merchant, when they enter into the contract. Initial margin deposits are
typically equal to a percentage of the contract's value. After they open a
futures contract, the parties to the transaction must compare the purchase
price of the contract to its daily market value. If the value of the futures
contract changes in such a way that a party's position declines, that party
must make additional "variation margin" payments so that the margin payment is
adequate. On the other hand, the value of the contract may change in such a
way that there is excess margin on deposit, possibly entitling the party that
has a gain to receive all or a portion of this amount. This process is known
as "marking to the market."
Although the actual terms of a futures contract calls for the actual delivery
of and payment for the underlying security, in many cases the parties may
close the contract early by taking an opposite position in an identical
contract. If the offsetting purchase price is less than the original purchase
price, the party closing the contract would realize a gain; if it is more, it
would realize a loss. The opposite is also true for a sale, that is, if the
offsetting sale price is more than the original sale price, the party closing
the contract would realize a gain; if it is less, it would realize a loss.
The portfolio will incur commission expenses in both opening and closing
futures positions.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an
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exchange (exchange-traded-options) or may be customized agreements between the
parties (over-the-counter or "OTC options"). Like futures, a financial
intermediary, known as a clearing corporation, financially backs exchange-
traded options. However, OTC options have no such intermediary and are subject
to the risk that the counter-party will not fulfill its obligations under the
contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the exercise price
plus the premium paid and related transaction costs. Otherwise, the portfolio
would realize either no gain or a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put option
to expire and the premium it received to offset the increase in the security's
value. If security prices remain the same over time, the portfolio would hope
to profit by closing out the put option at a lower price. If security prices
fall, the portfolio may lose an amount of money equal to the difference
between the value of the security and the premium it received. Writing covered
put options may deprive the portfolio of the opportunity to profit from a
decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
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. 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.
. In the case of an index, the portfolio of securities that corresponds to the
index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices.
. Maintaining the entire exercise price in liquid securities.
Options on Securities Indices
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price fluctuations
in a single security.
Options on Futures
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the option
by the holder, the contract market clearing house establishes a corresponding
short position for the writer of the option (in the case of a call option) or a
corresponding long position (in the case of a put option). If the option is
exercised, the parties will be subject to the futures contracts. In addition,
the writer of an option on a futures contract is subject to initial and
variation margin requirements on the option position. Options on futures
contracts are traded on the same contract market as the underlying futures
contract.
The buyer or seller of an option on a futures contract may terminate the option
early by purchasing or selling an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or sold.
The difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
The portfolio may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The portfolio may buy a put option on a
futures contract for the same reasons it would sell a futures contract. It also
may purchase such put options in order to hedge a long position in the
underlying futures contract. The portfolio may buy call options on futures
contracts for the same purpose as the actual purchase of the futures contracts,
such as in anticipation of favorable market conditions.
The portfolio may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If the
price of the futures contract at expiration were below the exercise price, the
portfolio would retain the option premium, which would offset, in part, any
decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if market price declines, the portfolio
would pay more than the market price for the underlying instrument.
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The premium received on the sale of the put option, less any transaction
costs, would reduce the net cost to the portfolio.
Combined Positions
The portfolio may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, the portfolio
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the portfolio
could write a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Swaps, Caps and Floors
Swap Agreements
A swap is a financial instrument that typically involves the exchange of cash
flows between two parties on specified dates (settlement dates), where the
cash flows are based on agreed-upon prices, rates, indices, etc. The nominal
amount on which the cash flows are calculated is called the notional amount.
Swaps are individually negotiated and structured to include exposure to a
variety of different types of investments or market factors, such as interest
rates, foreign currency rates, mortgage securities, corporate borrowing rates,
security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the portfolio and its share price. The performance of swap
agreements may be affected by a change in the specific interest rate,
currency, or other factors that determine the amounts of payments due to and
from the portfolio. If a swap agreement calls for payments by the portfolio,
the portfolio must be prepared to make such payments when due. In addition, if
the counter-party's creditworthiness declined, the value of a swap agreement
would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date only
under limited circumstances, such as default by one of the parties or
insolvency, among others, and can be transferred by a party only with the
prior written consent of the other party. The portfolio may be able to
eliminate its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counter-party is unable to
meet its obligations under the contract, declares bankruptcy, defaults or
becomes insolvent, the portfolio may not be able to recover the money it
expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a portfolio's
gains or losses. In order to reduce the risk associated with leveraging, a
portfolio will cover its current obligations under swap agreements according
to guidelines established by the Securities and Exchange Commission. If the
portfolio enters into a swap agreement on a net basis, it will segregate
assets with a daily value at least equal to the excess, if any, of the
portfolio's accrued obligations under the swap agreement over the accrued
amount the portfolio is entitled to receive under the agreement. If the
portfolio enters into a swap agreement on other than a net basis, it will
segregate assets with a value equal to the full amount of the portfolio's
accrued obligations under the agreement.
Equity Swaps -- In a typical equity index swap, one party agrees to pay
another party the return on a stock, stock index or basket of stocks in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the return on the interest
rate that the portfolio will be committed to pay.
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Interest Rate Swaps -- Interest rate swaps are financial instruments that
involve the exchange on one type of interest rate for another type of interest
rate cash flow on specified dates in the future. Some of the different types
of interest rate swaps are fixed-for floating rate swaps, termed basis swaps
and index amortizing swaps. Fixed-for floating rate swap, which involves the
exchange of fixed interest rate cash flows for floating rate cash flows.
Termed basis swaps entail cash flows to both parties based on floating
interest rates, where the interest rate indices are different. Index
amortizing swaps are typically fixed-for-floating swaps where the notional
amount changes if certain conditions are met.
Like a traditional investment in a debt security, a portfolio could lose money
by investing in an interest rate swap if interest rates change adversely. For
example, if the portfolio enters into a swap where it agrees to exchange a
floating rate of interest for a fixed rate of interest, the portfolio may have
to pay more money than it receives. Similarly, if the portfolio enters into a
swap where it agrees to exchange a fixed rate of interest for a floating rate
of interest, the portfolio may receive less money than it has agreed to pay.
Currency Swaps -- A currency swap is an agreement between two parties in which
one party agrees to make interest rate payments in one currency and the other
promises to make interest rate payments in another currency. A portfolio may
enter into a currency swap when it has one currency and desires a different
currency. Typically the interest rates that determine the currency swap
payments are fixed, although occasionally one or both parties may pay a
floating rate of interest. Unlike an interest rate swaps, however, the
principal amounts are exchanged at the beginning of the contract and returned
at the end of the contract. Currency swaps may be negatively affected by
changes in foreign exchange rates and changes in interest rates, as described
above.
Caps and Floors
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Risks of Derivatives
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the portfolio than if it had not entered into
any derivatives transactions. Derivatives may magnify the portfolio's gains
or losses, causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
portfolio holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could
expose the portfolio to greater risks.
Correlation of Prices
The portfolio's ability to hedge its securities through derivatives depends on
the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant securities. In the case of poor
correlation, the price of the securities the portfolio is hedging may not move
in the same amount, or even in the same direction as the hedging instrument.
The adviser will try to minimize this risk by investing only in those
contracts whose behavior it expects to resemble the portfolio securities it is
trying to hedge. However, if the portfolio's prediction of interest and
currency rates, market value, volatility or other economic factors is
incorrect, the portfolio may lose money, or may not make as much money as it
could have.
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.
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. 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.
. Differences between the derivatives, such as different margin requirements,
different liquidity of such markets and the participation of speculators in
such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on a
broad market index. Since narrower indices are made up of a smaller number of
securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of the
investments of the portfolio. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
portfolio against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the portfolio's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the portfolio's investments precisely over time.
Lack of Liquidity
Before a futures contract or option is exercised or expires, the portfolio can
terminate it only by entering into a closing purchase or sale transaction.
Moreover, a portfolio may close out a futures contract only on the exchange the
contract was initially traded. Although a portfolio intends to purchase options
and futures only where there appears to be an active market, there is no
guarantee that such a liquid market will exist. If there is no secondary market
for the contract, or the market is illiquid, the portfolio may not be able to
close out its position. In an illiquid market, the portfolio may:
. Have to sell securities to meet its daily margin requirements at a time when
it is disadvantageous to do so.
. Have to purchase or sell the instrument underlying the contract.
. Not be able to hedge its investments.
. 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.
. Investors may lose interest in a particular derivative or category of
derivatives.
Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at a
price below the current market price. Similarly, if the portfolio were to write
a put option based on the adviser's expectation that the price of the underlying
security
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would rise, but the price were to fall instead, the portfolio could be
required to purchase the security upon exercise at a price higher than the
current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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 prince of a derivative may vary from the settlement price of that
derivative at the end of the trading on previous day. Once the price of a
derivative reaches this value, a portfolio may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative's prices
have occasionally moved to the daily limit for several consecutive trading
days, preventing prompt liquidation of the derivative.
Because of the low margin deposits required upon the opening of a derivative
position, such transactions involve an extremely high degree of leverage.
Consequently, a relatively small price movement in a derivative may result in
an immediate and substantial loss (as well as gain) to the portfolio and it
may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the portfolio may have
to sell securities at a time when it is disadvantageous to do so to meet its
minimum daily margin requirement. The portfolio may lose its margin deposits
if a broker with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
INVESTMENT COMPANIES
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A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by the portfolio. Like other shareholders, each portfolio
would pay its proportionate share those fees. Consequently, shareholders of a
portfolio would pay not only the management fees of the portfolio, but also
the management fees of the investment company in which the portfolio invests.
The SEC has granted an order that allows each portfolio to invest the greater
of 5% of its total assets or $2.5 million in the UAM DSI Money Market
Portfolio, provided that the investment is:
. For cash management purposes.
. Consistent with the portfolio's investment policies and restrictions.
. The adviser to the investing portfolio waives any fees it earns on the
assets of the portfolio that are invested in the UAM DSI Money Market
Portfolio.
The investing portfolio will bear expenses of the UAM DSI Money Market
Portfolio on the same basis as all of its other shareholders.
REPURCHASE AGREEMENTS
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In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
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When it enters into a repurchase agreement, a portfolio will:
. Pay for the underlying securities only upon physically receiving them or
upon evidence of their receipt in book-entry form.
. 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 "mark to the market" on a daily basis).
If the seller of the security declares bankruptcy or otherwise becomes
financially unable to buy back the security, the portfolio's right to sell the
security may be restricted. In addition, the value of the security might
decline before the portfolio can sell it and the portfolio might incur
expenses in enforcing its rights.
RESTRICTED SECURITIES
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The portfolio may purchase restricted securities that are not registered for
sale to the general public but which are eligible for resale to qualified
institutional investors under Rule 144A of the Securities Act of 1933. Under
the supervision of the Fund's board, the adviser determines the liquidity of
such investments by considering all relevant factors. Provided that a dealer
or institutional trading market in such securities exists, these restricted
securities are not treated as illiquid securities for purposes of the
portfolio's investment limitations. The price realized from the sales of
these securities could be more or less than those originally paid by the
portfolio or less than what may be considered the fair value of such
securities.
SECURITIES LENDING
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A portfolio may lend a portion of its total assets to broker- dealers or other
financial institutions. The portfolio may then reinvest the collateral it
receives in short-term securities and money market funds. When a portfolio
lends its securities, it will follow the following guidelines:
. The borrower must provide collateral at least equal to the market value of
the securities loaned.
. The collateral must consist of cash, an irrevocable letter of credit issued
by a domestic U.S. bank or securities issued or guaranteed by the U. S.
government.
. The borrower must add to the collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis).
. The portfolio must be able to terminate the loan at any time.
. The portfolio must receive reasonable interest on the loan (which may
include the portfolio investing any cash collateral in interest bearing
short-term investments).
. The portfolio must determine that the borrower is an acceptable credit
risk.
These risks are similar to the ones involved with repurchase agreements. When
the portfolio lends securities, there is a risk that the borrower fails
financially become financially unable to honor its contractual obligations.
If this happens, the portfolio could
. Lose its rights in the collateral and not be able to retrieve the
securities it lent to the borrower.
. Experience delays in recovering its securities.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
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A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, the
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future.
In each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or delivery securities
until a later date. Typically, no income
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accrues on securities the portfolio has committed to purchase before the
securities are delivered, although the portfolio may earn income on securities
it has in a segregated account. The portfolio will only enter into these types
of transactions with the intention of actually acquiring the securities, but
may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers being an advantageous price and yield
at the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
The portfolio will add liquid assets to the account daily so that the value of
the assets in the account is equal to the amount of such commitments. Such
segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
WRAPPER AGREEMENTS
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Wrapper agreements are used in order to stabilize the NAV of the portfolio.
Each wrapper agreement obligates the wrapper provider to maintain the "book
value" of a portion of the portfolio's assets (covered assets) up to a
specified maximum dollar amount, upon the occurrence of certain specified
events. Generally, the book value of the covered assets is their (1) purchase
price plus interest on the covered assets accreted at a rate specified in the
wrapper agreement (crediting rate) less an adjustment to reflect any defaulted
securities. The crediting rate used in computing book value is calculated by a
formula specified in the wrapper agreement and is adjusted periodically. In
the case of wrapper agreements purchased by the portfolio, the crediting rate
is the actual interest earned on the covered assets, or an index-based
approximation thereof, plus or minus an adjustment for an amount receivable
from or payable to the wrapper provider based on fluctuations in the market
value of the covered assets. As a result, while the crediting rate will
generally reflect movements in the market rates of interest, it may at any
time be more or less than these rates or the actual interest income earned on
the covered assets. The crediting rate may also be impacted by defaulted
securities and by increases and decreases of the amount of covered assets as a
result of contributions and withdrawals tied to the purchase and redemption of
shares. In no event will the crediting rate fall below zero percent under the
wrapper agreements entered into by the portfolio.
Wrapper providers are banks, insurance companies and other financial
institutions. The number of wrapper providers has been increasing in recent
years. As of April 1998, there were approximately fifteen wrapper providers
rated in one of the top two long-term rating categories by Moody's, S&P or
another NRSRO. The cost of wrapper agreements is typically 0.10% to 0.25% per
dollar of covered assets per annum.
Generally, under the terms of a wrapper agreement, if the market value (plus
accrued interest on the underlying securities) of the covered assets is less
than their book value at the time the covered assets are liquidated in order
to provide proceeds for withdrawals of portfolio interests resulting from
redemptions of shares by IRA Owners, the wrapper provider becomes obligated to
pay to the portfolio the difference. Conversely, the portfolio becomes
obligated to make a payment to the wrapper provider if it is necessary for the
portfolio to liquidate covered assets at a price above their book value in
order to make withdrawal payments. (Withdrawals generally will arise when the
portfolio must pay shareholders who redeem shares.) Because it is anticipated
that each wrapper agreement will cover all covered assets up to a specified
dollar amount, if more than one wrapper provider becomes obligated to pay to
the portfolio the difference between book value and market value (plus accrued
interest on the underlying securities), each wrapper provider will be
obligated to pay an amount as designated by their contract according to the
withdrawal hierarchy specified
16
<PAGE>
by the Adviser in the wrapper agreement. Thus, the portfolio will not have the
option of choosing which wrapper agreement to draw upon in any such payment
situation.
The terms of the wrapper agreements vary concerning when these payments must
actually be made between the portfolio and the wrapper provider. In some
cases, payments may be due upon disposition of covered assets; other wrapper
agreements provide for settlement of payments only upon termination of the
wrapper agreement or total liquidation of the covered assets.
The portfolio expects that the use of wrapper agreements by the portfolio will
under most circumstances permit the portfolio to maintain a constant NAV and
to pay dividends that will generally reflect over time both the interest
income of, and market gains and losses on, the covered assets held by the
portfolio less the expenses of the portfolio. However, there can be no
guarantee that the portfolio will maintain a constant NAV or that any
shareholder will realize the same investment return as might be realized by
investing directly in the portfolio assets other than the wrapper agreements.
For example, a default by the issuer of a portfolio Security or a wrapper
provider on its obligations might result in a decrease in the value of the
portfolio assets and, consequently, the shares. The wrapper agreements
generally do not protect the portfolio from loss if an issuer of portfolio
securities defaults on payments of interest or principal. Additionally, a
portfolio shareholder may realize more or less than the actual investment
return on the portfolio Securities. Furthermore, there can be no assurance
that the portfolio will be able at all times to obtain wrapper agreements.
Although it is the current intention of the portfolio to obtain such
agreements covering all of its assets (with the exceptions noted), the
portfolio may elect not to cover some or all of its assets with wrapper
agreements should wrapper agreements become unavailable or should other
conditions such as cost, in the Adviser's sole discretion, render their
purchase inadvisable.
If, in the event of a default of a wrapper provider, the portfolio were unable
to obtain a replacement wrapper agreement, participants redeeming shares might
experience losses if the market value of the portfolio's assets no longer
covered by the wrapper agreement is below book value. The combination of the
default of a wrapper provider and an inability to obtain a replacement
agreement could render the portfolio and the portfolio unable to achieve their
investment objective of maintaining a stable NAV. If the governing board
determines that a wrapper provider is unable to make payments when due, that
Board may assign a fair value to the wrapper agreement that is less than the
difference between the book value and the market value (plus accrued interest
on the underlying securities) of the applicable covered assets and the
portfolio might be unable to maintain NAV stability.
Some wrapper agreements require that the portfolio maintain a specified
percentage of its total assets in short-term investments (liquidity reserve).
These short-term investments must be used for the payment of withdrawals from
the portfolio and portfolio expenses. To the extent the liquidity reserve
falls below the specified percentage of total assets, the portfolio is
obligated to direct all net cash flow to the replenishment of the liquidity
reserve. The obligation to maintain a liquidity reserve may result in a lower
return for the portfolio than if these funds were invested in longer-term debt
securities. The liquidity reserve required by all wrapper agreements is not
expected to exceed 2-10% of the portfolio's total assets.
Wrapper agreements may also require that the covered assets have a specified
duration or maturity, consist of specified types of securities or be of a
specified investment quality. The portfolio will purchase wrapper agreements
whose criteria in this regard are consistent with the portfolio's investment
objective and policies.
Wrapper agreements may also require the disposition of securities whose
ratings are downgraded below a certain level. This may limit the portfolio's
ability to hold such downgraded securities.
Wrapper agreements are structured with a number of different features. Wrapper
agreements purchased by the portfolio are of three basic types: (1) non-
participating, (2) participating and (3) "hybrid." In addition, the wrapper
agreements will either be of fixed-maturity or open-end maturity
("evergreen"). The portfolio enters into particular types of wrapper
agreements depending upon their respective cost to the portfolio and the
wrapper provider's creditworthiness, as well as upon other factors. Under most
circumstances, it is anticipated that the portfolio will enter into
participating wrapper agreements of open-end maturity and hybrid wrapper
agreements.
17
<PAGE>
Types of Wrapper Agreements
Non-Participating Wrapper Agreement
Under a non-participating wrapper agreement, the wrapper provider becomes
obligated to make a payment to the portfolio whenever the portfolio sells
covered assets at a price below book value to meet withdrawals of a type covered
by the wrapper agreement (a "Benefit Event"). Conversely, the portfolio becomes
obligated to make a payment to the wrapper provider whenever the portfolio sells
covered assets at a price above their book value in response to a Benefit Event.
In neither case is the crediting rate adjusted at the time of the Benefit Event.
Accordingly, under this type of wrapper agreement, while the portfolio is
protected against decreases in the market value of the covered assets below book
value, it does not realize increases in the market value of the covered assets
above book value; those increases are realized by the wrapper providers.
Participating Wrapper Agreement
Under a participating wrapper agreement, the obligation of the wrapper provider
or the portfolio to make payments to each other typically does not arise until
all of the covered assets have been liquidated. Instead of payments being made
on the occurrence of each Benefit Event, these obligations are a factor in the
periodic adjustment of the crediting rate.
Hybrid Wrapper Agreement
Under a hybrid wrapper agreement, the obligation of the wrapper provider or the
portfolio to make payments does not arise until withdrawals exceed a specified
percentage of the covered assets, after which time payment covering the
difference between market value and book value will occur. For example, a 50/50
hybrid wrap on $100mm of securities would provide for a participating wrapper be
in place for the first $50 million of withdrawals which might lead to
adjustments in the crediting rate, with a non-participating wrapper in place for
the next $50 million of withdrawals, with those withdrawals not creating any
adjustment to the crediting rate.
Fixed-Maturity Wrapper Agreement
A fixed-maturity wrapper agreement terminates at a specified date, at which time
settlement of any difference between book value and market value of the covered
assets occurs. A fixed-maturity wrapper agreement tends to ensure that the
covered assets provide a relatively fixed rate of return over a specified period
of time through bond immunization, which targets the duration of the covered
assets to the remaining life of the wrapper agreement.
Evergreen Wrapper Agreement
An evergreen wrapper agreement has no fixed maturity date on which payment must
be made, and the rate of return on the covered assets accordingly tends to vary.
Unlike the rate of return under a fixed-maturity wrapper agreement, the rate of
return on assets covered by an evergreen wrapper agreement tends to more closely
track prevailing market interest rates and thus tends to rise when interest
rates rise and fall when interest rates fall. An Evergreen wrapper agreement may
be converted into a fixed-maturity wrapper agreement that will mature in the
number of years equal to the duration of the covered assets.
Additional Risks of Wrapper Agreements
In the event of the default of a wrapper provider, the portfolio could
potentially lose the book value protections provided by the wrapper agreements
with that wrapper provider. However, the impact of such a default on the
portfolio as a whole may be minimal or non-existent if the market value of the
covered assets thereunder is greater than their book value at the time of the
default, because the wrapper provider would have no obligation to make payments
to the portfolio under those circumstances. In addition, the portfolio may be
able to obtain another wrapper agreement from another wrapper provider to
provide book value protections with respect to those covered assets. The cost of
the replacement wrapper agreement might be higher than the initial wrapper
agreement due to market conditions or if the market value (plus accrued interest
on the underlying securities) of those covered assets is less than their book
value at the time of entering into the
18
<PAGE>
replacement agreement. Such cost would also be in addition to any premiums
previously paid to the defaulting wrapper provider. If the portfolio were unable
to obtain a replacement wrapper agreement, participants redeeming shares might
experience losses if the market value of the portfolio's assets no longer
covered by the wrapper agreement is below book value. The combination of the
default of a wrapper provider and an inability to obtain a replacement agreement
could render the portfolio and the portfolio unable to achieve its investment
objective of seeking to maintain a stable NAV.
With respect to payments made under the wrapper agreements between the portfolio
and the wrapper provider, some wrapper agreements, as noted in the portfolio's
prospectus, provide that payments may be due upon disposition of the covered
assets, while others provide for payment only upon the total liquidation of the
Covered assets or upon termination of the wrapper agreement. In none of these
cases, however, would the terms of the wrapper agreements specify which
portfolio securities are to be disposed of or liquidated. Moreover, because it
is anticipated that each wrapper agreement will cover all covered assets up to a
specified dollar amount, if more than one wrapper provider becomes obligated to
pay to the portfolio the difference between book value and market value (plus
accrued interest on the underlying securities), each wrapper provider will pay a
pro-rata amount in proportion to the maximum dollar amount of coverage provided.
Thus, the portfolio will not have the option of choosing which wrapper agreement
to draw upon in any such payment situation. Under the terms of most wrapper
agreements, the wrapper provider will have the right to terminate the wrapper
agreement in the event that material changes are made to the portfolio's
investment objectives or limitations or to the nature of the portfolio's
operations. In such event, the portfolio may be obligated to pay the wrapper
provider termination fees. The portfolio will have the right to terminate a
wrapper agreement for any reason. Such right, however, may also be subject to
the payment of termination fees. In the event of termination of a wrapper
agreement or conversion of an Evergreen Wrapper Agreement to a fixed maturity,
some wrapper agreements may require that the duration of some portion of the
portfolio's securities be reduced to correspond to the fixed maturity or
termination date and that such securities maintain a higher credit rating than
is normally required, either of which requirements might adversely affect the
return of the portfolio.
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
The portfolio will determine percentages (with the exception of a limitation
relating to borrowing) immediately after and as a result of the portfolio's
acquisition of such security or other asset. Accordingly, the portfolio will not
consider changes in values, net assets or other circumstances when determining
whether the investment complies with its investment limitations.
Fundamental Policies
The following investment limitations are fundamental, which means the portfolio
cannot change them without approval by the vote of a majority of the outstanding
voting securities of the portfolio, as defined by the 1940 Act. The portfolio
will not:
. Make any investment that is inconsistent with its classification as a
diversified investment management company under the 1940 Act.
. Concentrate its investments in securities of issuers primarily engaged in
any particular industry (other securities issued or guaranteed by the
United States government or its agencies or instrumentalities or when the
portfolio adopts a temporary defensive position).
. Issue senior securities, except as permitted by the 1940 Act.
. Invest in physical commodities or contracts on physical commodities.
. Purchase or sell real estate or real estate limited partnerships, although it
may purchase and sell securities of companies which deal in real estate and
may purchase and sell securities which are secured by interests in real
estate.
. Make loans except (i) by that the acquisition of investment securities or
other investment instruments in accordance with the portfolio's prospectus
and statement of additional information shall not be deemed to
19
<PAGE>
be the making of a loan; and (ii) that the portfolio may lend its portfolio
securities in accordance with applicable law and the guidelines set forth in
the portfolio's prospectus and statement of additional information, as they
may be amended from time to time.
. Underwrite the securities of other issuers.
. Borrow money, except to the extent permitted by applicable law and the
guidelines set forth in the portfolio's prospectus and statement of
additional information, as they may be amended from time to time.
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio may
change them without shareholder approval.
The portfolio will not:
. Purchase on margin or sell short except that the portfolio may purchase
futures as described in the prospectus and this SAI.
. Invest more than 10% of its total assets in the securities of other
investment companies.
. Invest more than 5% of its total assets in the securities of any one
investment company.
. Acquire more than 3% of the voting securities of any other investment
company.
. Invest more than an aggregate of 15% of its net assets in securities that are
subject to legal or contractual restrictions on resale (restricted
securities) or securities for which there are no readily available markets
(illiquid securities).
Borrowing
The portfolio may borrow from banks and enter into reverse repurchase agreements
in an amount up to 33 1/3% of its total assets, taken at market value. The
portfolio may also borrow an additional 5% of its total assets from banks or
others for temporary or emergency purposes, such as the redemption of portfolio
shares. The portfolio may purchase additional securities so long as borrowings
do not exceed 5% of its total assets. The portfolio may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities.
Asset Coverage
The portfolio will cover its derivatives according to guidelines established by
the SEC so as to avoid creating a "senior security" (as defined in the 1940 act)
in connection with use of such instruments. Accordingly, the portfolio will
either own the securities underlying the derivative or will segregate with its
custodian cash or liquid securities in an amount at all times equal to the
portfolio's commitment with respect to these instruments or contracts. Assets
that are segregated for purposes of proving cover need not be physically
segregated in a separate account provided that the custodian notes on its books
that such securities are segregated. The portfolio will also cover its use of
wrapper agreements to the extent necessary to avoid creating a "senior security"
(as defined in the 1940 act) in connection with its purchase of such agreements.
Management Of The Fund
The governing board manages the business of the Fund. The governing board elects
officers to manage the day-to-day operations of the Fund and to execute policies
the board has formulated. The Fund pays each board member who is not also an
officer or affiliated person (independent board member) a $150 quarterly
retainer fee per active portfolio per quarter and a $2,000 meeting fee. In
addition, the Fund reimburses each independent board member for travel and other
expenses incurred while attending board meetings. The $2,000 meeting fee and
expense reimbursements are aggregated for all of the board members and allocated
proportionately among the portfolios of the UAM Funds Complex. The Fund does not
pay board members
20
<PAGE>
that are affiliated with the fund for their services as board members. UAM, its
affiliates or SEI pay the Fund's officers.
The following table lists the board members and officers of the Fund and
provides information regarding their present positions, date of birth, address,
principal occupations during the past five years, aggregate compensation
received from the Fund and total compensation received from the UAM Funds
Complex. The UAM Funds Complex is currently comprised of 48 portfolios. Those
people with an asterisk beside their name are "interested persons" of the Fund
as that term is defined in the 1940 Act. Mr. English does have an investment
advisory relationship with Investment Counselors of Maryland, an investment
adviser to one of the portfolios in the UAM Funds Complex. However, the Fund
does not believe that the relationship is a material business relationship, and,
therefore, does not consider him to be an "interested person" of the Fund. If
these circumstances change, the Board will determine whether any action is
required to change the composition of the Board.
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During from Fund as Complex as of
Name, Address, DOB with Fund the Past 5 years of 4/30/99 12/31/98
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management $8,094 $39,900
College Road -- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company, Inc.; President of Bennett
1/26/29 Management Company from 1988 to 1993.
------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund $8,094 $40,575
10 Garden Street Member since January 1999; Vice President for
Cambridge, MA 02138 Finance and Administration and Treasurer
8/14/51 of Radcliffe College from 1991 to 1999.
------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief $8,094 $40,936
100 King Street West Member Administrative Officer of Philip Services
P.O. Box 2440, LCD-1 Corp.; Formerly, a Partner in the
Hamilton Ontario, Philadelphia office of the law firm
Canada L8N-4J6 Dechert Price & Rhoads and a Director of
4/21/42 Hofler Corp.
------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer $8,094 $40,702
16 West Madison Street Member of Broventure Company, Inc.; Chairman of
Baltimore, MD 21201 the Board of Chektec Corporation and Cyber
8/5/48 Scientific, Inc.
------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, Inc. 0 0
211 Congress Street Member since March 1999; Vice President UAM
Boston, MA 02110 Trust Company since January 1996; Principal
2/24/53 of UAM Fund Distributors, Inc. since December
1995; Vice President of UAM Investment Services,
Inc. from January 1996 to March 1999 and a
Director and Chief Operating Officer of CS First
Boston Investment Management from 1993-1995.
------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a 0 0
One International Place Member; Director of United Asset Management
Boston, MA 02110 President Corporation; Director, Partner or Trustee of
3/21/35 and each of the Investment Companies of the Eaton
Chairman Vance Group of Mutual Funds.
------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of Dewey 0 0
One Financial Center Member Square Investors Corporation since 1988;
Boston, MA 02111 Director and Chief Executive Officer of H.T.
7/1/43 Investors, Inc., formerly a subsidiary of Dewey
Square.
------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief Financial 0 0
One International Place President Officer of United Asset Management Corporation.
Boston, MA 02110
9/19/47
------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI; Treasurer 0 0
211 Congress Street of the Fidelity Group of Mutual Funds from
Boston, MA 02110 1991 to 1995; held various other offices with
7/4/51 Fidelity Investments from November 1990 to
March 1995.
------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During from Fund as Complex as of
Name, Address, DOB with Fund the Past 5 years of 4/30/99 12/31/98
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael E. DeFao Secretary Vice President and General Counsel of UAMFSI 0 0
211 Congress Street and UAMFDI; Associate Attorney of Ropes &
Boston, MA 02110 Gray (a law firm) from 1993 to 1995.
2/28/68
------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of CGFSC from
Boston, MA 02110 1995 to 1996; Senior Manager of Deloitte &
9/18/63 Touche LLP from 1985 to 1995.
------------------------------------------------------------------------------------------------------------
Michael J. Leary Assistant Vice President of Chase Global Funds Services 0 0
73 Tremont Street Treasurer Company since 1993. Manager of Audit at
Boston, MA 02108 Ernst & Young from 1988 to 1993.
11/23/65
------------------------------------------------------------------------------------------------------------
Michelle Azrialy Assistant Assistant Treasurer of Chase Global Funds 0 0
73 Tremont Street Secretary Services Company since 1996. Senior Public
Boston, MA 02108 Accountant with Price Waterhouse LLP from
4/12/69 1991 to 1994.
</TABLE>
Investment Advisory and Other Services
Investment Adviser
- --------------------------------------------------------------------------------
Control of Adviser
The Adviser is located at 125 College Street, Burlington, Vermont 05401. The
Adviser (or its predecessor), an affiliate of United Asset Management
Corporation, has provided investment management services to corporations,
pension and profit-sharing plans, 401(k), 403(b) and thrift plans since 1978.
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 approximately 45 such affiliated firms (the "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 portfolio of the UAM Funds complex.
Investment Advisory Agreement
Service Performed by Adviser
Pursuant to the Investment Advisory Agreement (Advisory Agreement) between the
Fund and the Adviser, the Adviser has agreed to:
. Manage the investment and reinvestment of the assets of the portfolio.
. Continuously review, supervise and administer the investment program
of the portfolio.
. Determine in its discretion the securities the portfolio will buy or
sell and the portion of its assets the portfolio will hold uninvested.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence of the
part of the Adviser in the performance of its obligations and duties under the
Advisory Agreement, (2) reckless disregard by the Adviser
22
<PAGE>
of its obligations and duties under the Advisory Agreement, or (3) a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services, the Adviser shall not be subject to any liability
whatsoever to the Fund, for any error of judgment, mistake of law or any other
act or omission in the course of, or connected with, rendering services under
the Advisory Agreement.
Continuing an Advisory Agreement
Unless sooner terminated, an Advisory Agreement shall continue for periods of
one year so long as such continuance is specifically approved at least annually
(a) by a majority of those members of the governing board of the Fund who are
not parties to the Advisory Agreement or interested persons of any such party
and (b) by a majority of the governing board of the Fund or a majority of the
shareholders of the portfolio. An Advisory Agreement may be terminated at any
time by the Fund, without the payment of any penalty, by vote of a majority of
the portfolio' shareholders on 60 days' written notice to the Adviser. The
Adviser may terminate the Advisory Agreements at any time, without the payment
of any penalty, upon 90 days' written notice to the Fund. An Advisory Agreement
will automatically and immediately terminate if it is assigned.
Investment Advisory Fee
For its services, the Adviser receives an advisory fee calculated annual rate of
0.50% of the average daily net assets of the portfolio for the month. The
Adviser's fee is paid monthly.
Expense Limitation
The Adviser may voluntarily agree to limit the expenses of the portfolio. The
Adviser may reduce its compensation to the extent that the expenses of the
portfolio exceed such lower expense limitation as the Adviser may, by notice to
the portfolio, declare to be effective. The expenses subject to this limitation
are exclusive of brokerage commissions, interest, taxes, deferred organizational
and extraordinary expenses and, if the fund has a distribution plan, payments
required under such plan. The prospectus describes the terms of any expense
limitation that are in effect from time to time.
Representative Institutional Clients
As of the date of this SAI, the Adviser's representative institutional clients
included Morgan Stanley, MFS, SEI Corporation, Chase Manhattan Bank, Asea Brown
Boveri, Hoffmann-LaRoche and the State of Vermont.
In compiling this client list, the Adviser used objective criteria such as
account size, geographic location and client classification. The Adviser did not
use any performance-based criteria. It is not known whether these clients
approve or disapprove of the Adviser or the advisory services provided.
DISTRIBUTOR
- --------------------------------------------------------------------------------
UAMFDI is the Fund's distributor. The Fund offers its shares continuously. While
UAMFDI will use its best efforts to sell shares of the Fund, it is not obligated
to sell any particular amount of shares. UAMFDI receives no compensation for its
services, and any amounts it may receive under a Service and Distribution Plan
are passed through their entirety to third parties. UAMFDI, an affiliate of UAM,
is located at 211 Congress Street, Boston, Massachusetts 02110.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a part
of its responsibilities, UAMFSI provides and oversees the provision by various
third parties of administrative, fund accounting, dividend disbursing and
transfer agent services for the Fund. UAMFSI, an affiliate of UAM, has its
principal office at 211 Congress Street, Boston, Massachusetts 02110.
23
<PAGE>
UAMFSI will bear all expenses in connection with the performance of its services
under the Fund Administration Agreement. Other expenses to be incurred in the
operation of the Fund will be borne by the Fund or other parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and members of the board who are not officers,
directors, shareholders or employees of an affiliate of UAM, including
UAMFSI, UAMFDI or the adviser.
. SEC fees and state Blue-Sky fees.
. EDGAR filing fees.
. Processing services and related fees.
. Advisory and administration fees.
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Fund.
. Printing and production costs of shareholders' reports and corporate
meetings.
. Cost and expenses of Fund stationery and forms.
. Costs of special telephone and data lines and devices.
. Trade association dues and expenses.
. Any extraordinary expenses and other customary Fund expenses.
The Fund Administration Agreement continues in effect from year to year if the
Board specifically approves such continuance every year. The Board or UAMFSI may
terminate the Fund Administration Agreement, without penalty, on not less than
ninety (90) days' written notice. The Fund Administration Agreement
automatically terminates upon its assignment by UAMFSI without the prior written
consent of the Fund.
UAMFSI will from time to time employ other people to assist it in performing its
duties under the Fund Administration Agreement. Such people may be officers and
employees who are employed by both UAMFSI and the Fund. UAMFSI will pay such
people for such employment. The Fund will not incur any obligations with respect
to such people.
Administration and Transfer Agency Services Fees
The portfolio pays a four-part fee to UAMFSI as follows:
1. In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $19,500 for the first operational class; plus
. $3,750 for each additional class; plus
. 0.063% of the aggregate net assets of the portfolio.
2. The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by SEI. The fee, which UAMFSI pays to SEI, is calculated at
the annual rate of:
. Not more than $35,000 for the first operational class; plus
24
<PAGE>
. $5,000 for each additional operational class; plus
. 0.03% of their pro rata share of the combined assets of the Fund, UAM Funds,
Inc. and UAM Funds Trust II.
3. An annual base fee that UAMFSI pays to DST Systems, Inc. for its services as
transfer agent and dividend-disbursing agent equal to $10,500 for the first
operational class and $10,500 for each additional class.
4. An annual base fee that UAMFSI pays to UAMSSC for its services as sub-
shareholder-servicing agent equal to $7,500 for the first operational class
and $2,500 for each additional class.
CUSTODIAN
- --------------------------------------------------------------------------------
The Chase Manhattan Bank, 3 Chase MetroTech Center, Brooklyn, New York 11245,
provides for the custody of the Fund's assets pursuant to the terms of a
custodian agreement with the Fund.
INDEPENDENT PUBLIC ACCOUNTANT
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountant for the Fund.
SERVICE AND DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan and a Shareholder Servicing Plan (the
"Plans") for their 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 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 Fund 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.
25
<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 portfolio to pay UAMFDI or others for
certain distribution, promotional and related expenses involved in marketing
its Institutional Service Class Shares. Under the Distribution Plan,
Institutional Service Class Shares may pay distribution fees at the maximum
annual rate of 0.75% of the average daily net asset value of such shares held
by the Service Agent for the benefit of its customers. These expenses
include, among other things:
. Advertising the availability of services and products.
. Designing materials to send to customers and developing methods of making
such materials accessible to customers.
. Providing information about the product needs of customers.
. Providing facilities to solicit Fund sales and to answer questions from
prospective and existing investors about the Fund.
. Receiving and answering correspondence from prospective investors, including
requests for sales literature, prospectuses and statements of additional
information.
. Displaying and making available sales literature and prospectuses.
. Acting as liaison between shareholders and the Fund, including obtaining
information from the Fund and providing performance and other information
about the Fund.
In addition, the Service Class Shares may make payments directly to other
unaffiliated parties, who either aid in the distribution of their shares or
provide services to the Class.
Fees Paid under the Service and Distribution Plans
The Plans permit Institutional Service Class shares to pay distribution and
service fees at the maximum annual rate of 1.00% of the class' average daily net
assets for the year. The Fund's governing board has limited the amount the
Institutional Service Class may pay under the Plans to 0.40% of the class'
average daily net assets for the year, and may increase such amount to the plan
maximum at any time.
The Fund will not reimburse the Distributor or others for distribution expenses
incurred in excess of the amount permitted by the Plans.
Subject to seeking best price and execution, the Fund may buy or sell portfolio
securities through firms that receive payments under the Plans. UAMFDI, at its
own expense, may pay dealers for aid in distribution or for aid in providing
administrative services to shareholders.
Approving, Amending and Terminating the Fund's Distribution Arrangements
Shareholders of the portfolio have approved the Plans. The Plans also were
approved by the governing board of the Fund, including a majority of the members
of the board who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plans (Plan Members), by
votes cast in person at meetings called for the purpose of voting on these
Plans.
Continuing the Plans
The Plans continue in effect from year to year so long as they are approved
annually by a majority of the Fund's board members and its Plan Members. To
continue the Plans, the board must determine whether such continuation is in the
best interest of the Institutional Service Class shareholders and that there is
a reasonable likelihood of the Plans providing a benefit to the Class. The
Fund's board has determined that the
26
<PAGE>
Fund's distribution arrangements are likely to benefit the Fund and its
shareholders by enhancing the Fund's ability to efficiently service the accounts
of its Institutional Service Class shareholders.
Amending the Plans
A majority of the Fund's governing board and a majority of its the Plan Members
must approve any material amendment to the Plans. Likewise, any amendment
materially increasing the maximum percentage payable under the Plans must be
approved by a majority of the outstanding voting securities of the Class, as
well as by a majority of the Plan Members.
Terminating the Plans
A majority of the Plan Members or a majority of the outstanding voting
securities of the Class may terminate the Plans at any time without penalty. In
addition, the Plans will terminate automatically upon their assignment.
Miscellaneous
So long as the Plans are in effect, the non-interested board members will select
and nominate the Plan Members of the Fund.
The Fund and UAMFDI intend to comply with the Conduct Rules of the National
Association of Securities Dealers relating to investment company sales charges.
with these rules.
Pursuant to the Plans, the board reviews, at least quarterly, a written report
of the amounts expended under each agreement with Service Agents and the
purposes for which the expenditures were made.
Additional Non-12b-1 Shareholder Servicing Arrangements
In addition to payments by the Fund under the Plans, UAM and any of its
affiliates, may, at its own expense, compensate a Service Agent or other person
for marketing, shareholder servicing, record-keeping and/or other services
performed with respect to the Fund, the portfolio or any class of shares of the
portfolio. The person making such payments may do so out of its revenues, its
profits or any other source available to it. Such services arrangements, when in
effect, are made generally available to all qualified service providers. The
adviser may also compensate its affiliated companies for referring investors to
the portfolio.
Brokerage Allocation and Other Practices
Selection of Brokers
- --------------------------------------------------------------------------------
The Advisory Agreement authorizes the adviser to select the brokers or dealers
that will execute the purchases and sales of investment securities for the
portfolio. The Advisory Agreement also directs the adviser to use its best
efforts to obtain the best execution with respect to all transactions for the
portfolio. The adviser may select brokers based on research, statistical and
pricing services they provide to the adviser. Information and research provided
by a broker will be in addition to, and not instead of, the services the adviser
is required to perform under the Advisory Agreement. In so doing, the portfolio
may pay higher commission rates than the lowest rate available when the adviser
believes it is reasonable to do so in light of the value of the research,
statistical, and pricing services provided by the broker effecting the
transaction.
It is not the practice of the Fund to allocate brokerage or effect principal
transactions with dealers based on sales of shares that a broker-dealer firm
makes. However, the Fund may place trades with qualified broker-dealers who
recommend the Fund or who act as agents in the purchase of Fund shares for their
clients.
SIMULTANEOUS TRANSACTIONS
- --------------------------------------------------------------------------------
The adviser makes investment decisions for the portfolio independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for the
27
<PAGE>
adviser to engage in a simultaneous transaction, that is, buy or sell the same
security for more than one client. The adviser strives to allocate such
transactions among its clients, including the portfolio, in a fair and
reasonable manner. Although there is no specified formula for allocating such
transactions, the Fund's governing board periodically reviews the various
allocation methods used by the adviser.
BROKERAGE COMMISSIONS
- --------------------------------------------------------------------------------
Equity Securities
Generally, equity securities are bought and sold through brokerage transactions
for which commissions are payable. Purchases from underwriters will include the
underwriting commission or concession, and purchases from dealers serving as
market makers will include a dealer's mark-up or reflect a dealer's mark-down.
Debt Securities
Debt securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, each 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 portfolio executes transactions in the over-the-
counter market, it will deal with primary market makers unless prices that are
more favorable are otherwise obtainable.
Capital Stock and Other Securities
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Declaration of Trust, as amended, permit its governing board to issue
an unlimited number of shares without par value. The governing board has the
power to create and designate one or more series (portfolio) or classes of
shares of common stock and to classify or reclassify any unissued shares at any
time and without shareholder approval. When issued and paid for, the shares of
each series and class of the Fund are fully paid and nonassessable, and have no
pre-emptive rights or preference as to conversion, exchange, dividends,
retirement or other features. The shares of each series and class have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the governing board can elect 100%
of the members if they choose to do so. On each matter submitted to a vote of
the shareholders, a shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Fund. Shares of all classes will vote together as a
single class except when otherwise required by law or as determined by the
members of the Fund's governing board.
If the Fund is liquidated, the shareholders of the portfolio or any class
thereof are entitled to receive the net assets belonging to the portfolio, or in
the case of a class, belonging to the portfolio and allocable to that class. The
Fund will distribute is net assets to its shareholders in proportion to the
number of shares of the portfolio or class thereof held by them and recorded on
the books of the Fund. The liquidation of the portfolio or any class thereof may
be authorized at any time by vote of a majority of the members of the governing
board.
The governing board has authorized two classes of shares, Institutional and
Institutional Service. Both Institutional Class and Institutional Service Class
Shares represent interests in the same assets of the portfolio and, except as
discussed below, are identical in all respects. Unlike Institutional Class
Shares, Institutional Service Class Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have exclusive
voting rights with respect to matters relating to such distribution
expenditures. The two classes also have different exchange privileges. The net
income attributable to Institutional Service Class Shares and the dividends
payable on Institutional Service Class Shares will be reduced by the amount of
the shareholder servicing and distribution fees; accordingly, the net asset
value of the Institutional Service Class Shares will be reduced by such amount
to the extent the portfolio has undistributed net income.
28
<PAGE>
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law. The Fund has undertaken that the governing board will
call a meeting of shareholders if such a meeting is requested in writing by the
holders of not less than 10% of the outstanding shares of the Fund. The Fund
will assist shareholder communications in such matters to the extent required by
the undertaking.
Dividends And Capital Gains Distributions
The Fund tries to distribute substantially all of the net investment income of
the portfolio and net realized capital gains so as to avoid income taxes on its
dividends and distributions and the imposition of the federal excise tax on
undistributed income and capital gains. However, the Fund cannot predict the
time or amount of any such dividends or distributions.
Distributions by the portfolio reduce its NAV. A distribution that reduces the
NAV of the portfolio below its cost basis is taxable as described in the
prospectus of the portfolio, although from an investment standpoint, it is a
return of capital. If you buy shares of the portfolio on or before the "record
date" -- the date that establishes which shareholders will receive an upcoming
distribution -- for a distribution, you will receive some of the money you
invested as a taxable distribution.
Unless the shareholder elects otherwise in writing, all dividend and capital
gains distributions are automatically received in additional shares of the
portfolio at net asset value (as of the business day following the record date).
This will remain in effect until the Fund is notified by the shareholder in
writing at least three days prior to the record date that either the Income
Option (income dividends in cash and capital gains distributions in additional
shares at net asset value) or the Cash Option (both income dividends and capital
gains distributions in cash) has been elected. An account statement is sent to
shareholders whenever an income dividend or capital gains distribution is paid.
The portfolio will be treated as a separate entity (and hence as a separate
"regulated investment company") for federal tax purposes. The portfolio will
distribute its net capital gains to its investors, but will not offset (for
federal income tax purposes) such gains against any net capital losses of
another portfolio.
Purchase Redemption and Pricing of Shares
NET ASSET VALUE PER SHARE
- --------------------------------------------------------------------------------
Calculating NAV
The purchase and redemption price of the shares of a portfolio is equal to the
NAV of the portfolio. The fund calculates the NAV of a portfolio by subtracting
its liabilities from its total assets and dividing the result by the total
number of shares outstanding. For purposes of this calculation
. Liabilities include accrued expenses and dividends payable.
. Total assets include the market value of the securities held by the
portfolio, plus cash and other assets plus income accrued but not yet
received.
Each portfolio normally calculates its NAV as of the close of trading on the
NYSE every day the NYSE is open for trading. The NYSE usually closes at 4:00
p.m. The NYSE is closed on the following days: New Year's Day, Dr. Martin Luther
King, Jr. Day, President's 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
29
<PAGE>
for which market quotations are readily available are valued neither exceeding
the asked prices nor less than the bid prices. Quotations of foreign securities
in a foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S. dollars
quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at fair
value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their customers.
To do so, the Service Agent must receive your investment order before the close
of trading on the NYSE and must transmit it to the fund before the close of its
business day to receive that day's share price. The fund must receive proper
payment for the order by the time the portfolio calculates its NAV on the
following business day. Service Agents are responsible to their customers and
the Fund for timely transmission of all subscription and redemption requests,
investment information, documentation and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the fund allows a shareholder to
make an in-kind purchase, it will value such securities according to the
policies described under "VALUATION OF SHARES" at the next determination of net
asset value after acceptance. The fund will issue shares of the portfolio at the
NAV of the portfolio determined as of the same time.
The fund will only acquire securities through an in-kind purchase for investment
and not for immediate resale. The fund will only accept in-kind purchases if the
transaction meets the following conditions:
. The securities are eligible investments for the portfolio.
. The securities have readily available market quotations.
. The investor represents and agrees that the securities are liquid and that
there are no restrictions on their resale imposed by the 1933 Act or
otherwise.
. All dividends, interest, subscription, or other rights pertaining to such
securities become the property of the portfolio and are delivered to the
fund by the investor upon receipt from the issuer.
. Immediately after the transaction is complete, the value of all securities of
the same issuer held by the portfolio cannot exceed 5% of the net assets of
the portfolio. This condition does not apply to U.S. government securities.
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<PAGE>
Investors who are subject to Federal taxation upon exchange may realize a gain
or loss for federal income tax purposes depending upon the cost of securities or
local currency exchanged. Investors interested in such exchanges should contact
the adviser.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
When you redeem, your shares may be worth more or less than the price you paid
for them depending on the market value of the investments held by the portfolio.
By Mail
Requests to redeem shares must include:
. Share certificates, if issued.
. A letter of instruction or an assignment specifying the number of shares or
dollar amount the shareholder wishes to redeem signed by all registered
owners of the shares in the exact names in which they are registered.
. Any required signature guarantees (see "Signature Guarantees").
. Estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations must submit any other necessary
legal documents.
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 the manner, you must submit a
written request that each shareholder signed, with each signature
guaranteed).
. Redeem shares represented by a certificate.
The fund and its UAMSSC will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and they may be liable for
any losses if they fail to do so. These procedures include requiring the
investor to provide certain personal identification at the time an account is
opened and before effecting each transaction requested by telephone. In
addition, all telephone transaction requests will be recorded and investors may
be required to provide additional telecopied written instructions of such
transaction requests. The fund or UAMSSC may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the fund or the UAMSSC does
not employ the procedures described above. Neither the fund nor the UAMSSC will
be responsible for any loss, liability, cost or expense for following
instructions received by telephone that it reasonably believes to be genuine.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should specify the
total number of shares to be redeemed.
. 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
31
<PAGE>
by calling 1-877-826-5465. Broker-dealers guaranteeing signatures must be a
member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will pay
your redemption proceeds earlier as applicable law so requires.
The Fund may suspend redemption privileges or postpone the date of payment:
. When the NYSE and custodian bank are closed.
. Trading on the NYSE is restricted.
. During any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the
portfolio to dispose of securities owned by it, or to fairly determine the
value of its assets.
. For such other periods as the Commission may permit.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making a
written request to the Fund. Your request should clearly identify the account
and number of shares you wish to transfer. All registered owners should sign the
request and all stock certificates, if any, which are subject to the transfer.
The signature on the letter of request, the stock certificate or any stock power
must be guaranteed in the same manner as described under "Signature Guarantees."
As in the case of redemptions, the written request must be received in good
order before any transfer can be made.
VALUATION OF SHARES
- --------------------------------------------------------------------------------
The Fund does not price its shares on those days when the New York Stock
Exchange is closed, which are currently: Presidents' Day; Good Friday; Memorial
Day; Independence Day; Labor Day; Thanksgiving Day; Christmas Day; New Year's
Day and Dr. Martin Luther King, Jr. Day.
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 UAM Funds' boards determines that amortized cost reflects fair
value.
Wrapper Agreements
The value of Wrapper Agreements determined in good faith at fair value using
methods determined by the UAM Funds' boards. The fair value of a wrapper
agreement generally will be equal to the difference between the book value and
the market value of the applicable covered assets after consideration is given
to the credit rating of the wrap provider and its ability to pay amounts due
under the wrapper agreement. If the board determines that a wrap provider is
unable to make such payments, the board may assign a value to the wrapper
agreement that is less than the difference between the book value and the market
value of the covered assets, which might adversely affect the portfolio's
ability to maintain a stable NAV.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including illiquid and restricted securities) is determined in good
faith at fair value using methods determined by the UAM Funds' boards.
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<PAGE>
Performance Calculations
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and are
not intended to indicate future performance. The SEC has adopted rules that
require mutual funds to present performance quotations in a standard manner.
Mutual funds can present non-standard performance quotations only if they also
provide certain standardized performance information that they have computed
according to the requirements of the SEC. The fund calculates its current yield
and average annual compounded total return information using the method of
computing performance mandated by the SEC.
The fund calculates separately the performance for the Institutional Class and
Service Class Shares of each portfolio. Dividends paid by a portfolio with
respect to Institutional Class and Service Class Shares will be calculated in
the same manner at the same time on the same day and will be in the same amount,
except that service fees, distribution charges and any incremental transfer
agency costs relating to Service Class Shares will be borne exclusively by that
class.
TOTAL RETURN
- --------------------------------------------------------------------------------
Total return is the change in value of an investment in the portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative or aggregate total return reflects actual performance over a stated
period. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period.
The fund calculates the average annual total return of 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).
YIELD
- --------------------------------------------------------------------------------
Yield refers to the income generated by an investment in the portfolio over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all 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.
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<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
- --------------------------------------------------------------------------------
The portfolio's performance may be compared to data prepared by independent
services which monitor the performance of investment companies, data reported in
financial and industry publications, and various indices as further described in
the SAI. This information may also be included in sales literature and
advertising.
To help investors better evaluate how an investment in the portfolio of the Fund
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 Appendix B for publications, indices and averages that may be used.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the]portfolio, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
portfolio to calculate its performance. In addition, there can be no assurance
that the portfolio will continue this performance as compared to such other
averages.
TAXES
- --------------------------------------------------------------------------------
In order for the portfolio to continue to qualify for federal income tax
treatment as a regulated investment company under the Internal Revenue Code of
1986, as amended, at least 90% of its gross income for a taxable year must be
derived from qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or foreign
currencies, or other income derived with respect to its business of investing in
such securities or currencies.
The portfolio will distribute to shareholders annually any net capital gains
that have been recognized for federal income tax purposes. Shareholders will be
advised on the nature of the payments.
If for any taxable year a portfolio does not qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code, all of the portfolio's
taxable income would be subject to tax at regular corporate rates without any
deduction for distributions to shareholders. In this event, a portfolio's
distributions to shareholders would be taxable as ordinary income to the extent
of the current and accumulated earnings and profits of the particular portfolio,
and would be eligible for the dividends received deduction in the case of
corporate shareholders.
Dividends and interest received by each portfolio may give rise to withholding
and other taxes imposed by foreign countries. These taxes reduce each
portfolio's dividends but are included in the taxable income reported on your
tax statement if each portfolio qualifies for this tax treatment and elects to
pass it through to you. Consult a tax adviser for more information regarding
deductions and credits for foreign taxes.
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Appendix A: Description of
Securities and Ratings
A-1
<PAGE>
Moody's Investors Service, Inc.
Preferred Stock Ratings
- --------------------------------------------------------------------------------
aaa An issue which is rated "aaa" is considered to be a
top-quality preferred stock. This rating indicates good
asset protection and the least risk of dividend impairment
within the universe of preferred stock.
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 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 periods 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.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Debt Ratings - Taxable Debt & Deposits Globally
- --------------------------------------------------------------------------------
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality
by all standards. 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.
A-1
<PAGE>
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as
well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
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:
. High rates of return on funds employed.
. Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
. Broad leading market positions in well-established
industries.
. 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.
A-2
<PAGE>
Standard & Poor's Ratings Services
Preferred Stock Ratings
- --------------------------------------------------------------------------------
AAA This is the highest rating that may be assigned by Standard
& Poor's to a preferred stock issue and indicates an
extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated AA also qualifies as a
high-quality, fixed-income security. The capacity to pay
preferred stock obligations is very strong, although not as
overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for
a preferred stock in this category than for issues in the A
category.
BB, B, Preferred stock rated BB, B, and CCC are regarded,
CCC on balance, as predominantly speculative with respect to
the issuer's capacity to pay preferred stock obligations.
BB indicates the lowest degree of speculation and CCC the
highest. While such issues will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
CC The rating CC is reserved for a preferred stock issue that
is in arrears on dividends or sinking fund payments, but
that is currently paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the
issuer in default on debt instruments.
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 type of obligation as a matter of policy.
Plus (+) or To provide more detailed indications of preferred stock
minus (-) quality, 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.
Long-Term Issue Credit Ratings
- --------------------------------------------------------------------------------
Issue credit ratings are based, in varying degrees, on the following
considerations:
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;
Nature of and provisions of the obligation;
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.
AAA An obligation rated AAA have 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 obligator to meet its financial
commitment on the obligation.
A-3
<PAGE>
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major risk exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment
than other speculative issues. However, it faces major
ongoing uncertainties or exposures to adverse business,
financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the
capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the
obligation.
CCC An obligation rated CCC is currently vulnerable to
non-payment, and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its
financial commitment on the obligations.
CC An obligation rated CC is currently highly vulnerable to
nonpayment.
C The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
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.
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.
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.
Short-Term Issue Credit Ratings
- --------------------------------------------------------------------------------
Short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means
obligations with an original maturity of no more than 365 days - including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating in which the short-term rating
addresses the put feature, in addition to the usual long-term rating.
Medium-term notes are assigned long-term 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 obligation 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.
A-4
<PAGE>
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.
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 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 variability
in risk during economic cycles.
BBB-
BB+/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/B- Below investment grade and possessing risk that obligation
will not be net 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. 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.
A-5
<PAGE>
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 for
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.
B 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.
A-6
<PAGE>
DDD,DD,D Default. Securities are not meeting current obligations
and are extremely speculative. 'DDD' designates the
highest potential for recovery of amounts outstanding on
any securities involved. For U.S. corporates, for example,
'DD' indicates expected recovery of 50% - 90% of such
outstandings, and 'D' the lowest recovery potential, i.e.
below 50%.
International Short-Term Credit Ratings
F1 Highest credit quality. Indicates the strongest 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.
A-7
<PAGE>
Appendix B - Comparisons
B-1
<PAGE>
CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. --
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of
Labor Statistics -- a statistical measure of change, over time in the price of
goods and services in major expenditure groups.
Donoghue's Money Fund Average -- is an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
Dow Jones Industrial Average - a price-weighted average of thirty blue-chip
stocks that are generally the leaders in their industry and are listed on the
New York Stock Exchange. It has been a widely followed indicator of the stock
market since October 1, 1928.
Dow Jones Industrial Average -- an unmanaged price weighted average of 30 blue-
chip stocks.
Financial publications: Business Week, Changing Times, Financial World, Forbes,
Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global Investor,
Investor's Daily, Lipper Analytical Services, Inc., Morningstar, Inc., New York
Times, Personal Investor, 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 - an average of all major money market fund
yields, published weekly for 7- and 30-day yields.
IFC Investable Index - an unmanaged index maintained by the International
Finance Corporation. This index consists of 890 companies in 25 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 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 $200 million for U.S. government
issues and $25 million for others.
Lehman Corporate Bond Index - an unmanaged indices of all publicly issues,
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 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 corporation, and corporate debt guaranteed
by the U.S. government). In addition to the aggregate index, sub-indices cover
intermediate and long term issues.
Lehman Government/Corporate 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 r 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 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 Intermediate Government/Corporate Index - an unmanaged fixed income
market value-weighted index that combines the Lehman Government Bond Index
(intermediate-term sub-index) and Lehman Corporate Bond Index.
B-2
<PAGE>
Lipper 1-5 Year Short 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 5 years or less.
Lipper Balanced Fund Index - an unmanaged index of open-end equity funds whose
primary objective is to conserve principal by maintaining at all time a balanced
portfolio of both stocks and bonds. Typically, the stock/bond ratio ranges
around 60%/40%.
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.
Lipper Equity Mid Cap Fund Index - an unmanaged index of funds which by
prospectus or portfolio practice invest primarily in companies with market
capitalizations less than $5 billion at the time of purchase.
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.
Lipper Growth Fund Index - an unmanaged index composed of the 30 largest funds
by asset size in this investment objective.
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).
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.
New York Stock Exchange composite or component indices - unmanaged indices of
all industrial, utilities, transportation and finance stocks listed on the New
York Stock Exchange.
Russell 1000 Index - an unmanaged index composed of the 1000 largest stocks in
the Russell 3000 Index.
Russell 2000 Growth Index - contains those Russell 2000 securities with higher
price-to-book ratios and higher forecasted growth values.
Russell 2000 Index - an unmanaged index composed of the 2,000 smallest stocks
in the Russell 3000 Index.
Russell 2000 Value Index - contains those Russell 2000 securities with a less-
than-average growth orientation. Securities in this index tend to exhibit lower
price-to-book and price-earnings ratios, higher dividend yields and lower
forecasted growth values than the growth universe.
Russell 2500 Growth Index - contains those Russell 2500 securities with a
greater-than-average growth orientation. Securities in this index tend to
exhibit higher price-to-book and price-earnings ratios, lower dividend yields
and higher forecasted growth values than the value universe.
Russell 2500 Index - an unmanaged index composed of the 2,5000 smallest stocks
in the Russell 3000.
Russell 2500 Value Index - contains those Russell 2500 securities with a less-
than-average growth orientation. Securities in this index tend to exhibit lower
price-to-book and price-earnings ratios, higher dividend yields and lower
forecasted growth values then the Growth universe.
B-3
<PAGE>
Russell 3000 Index - composed of the 3,000 largest U.S. publically traded
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
Russell Mid-Cap Index - is composed of the 800 smallest stocks in the Russell
1000 Index, with an average capitalization of $1.96 billion.
Salomon Smith Barney Global excluding U.S. Equity Index - an 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 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.
Standard & Poors' 600 Small Cap 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.
Standard & Poors' Midcap 400 Index - consists of 400 domestic stocks chosen for
market size (medium market capitalization of approximately $700 million),
liquidity, and industry group representation. It is a market-value weighted
index with each stock affecting the index in proportion to its market value.
Standard & Poors' 500 Stock Index - an unmanaged index composed of 400
industrial stocks, 40 financial stocks, 40 utilities stocks and 20
transportation stocks.
Standard & Poors' Barra Value Index - is constructed by dividing the securities
in the S&P 500 Index according to price-to-book ratio. This index contains the
securities with the lower price-to-book ratios; the securities with the higher
price-to-book ratios are contained in the Standard & Poor's Barra Growth Index.
Standard & Poors' 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.
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.
U.S. Three-Month Treasury Bill Average - the average return for all treasury
bills for the previous three month period.
Value Line - 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
he 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.
B-4
