<PAGE>
Securities Act File No. 33-79858
Investment Company Act of 1940 File No. 811-8544
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 31 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 32 /X/
UAM FUNDS TRUST
(Exact Name of Registrant as specified in Charter)
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c/o UAM Fund Services, Inc.
211 Congress St., 4th Floor
Boston, Massachusetts 02110
Registrant's Telephone Number (617) 542-5440
(Address of Principal Executive Offices)
----------------------------------------
Michael E. DeFao, Esq.
Secretary
UAM Fund Services, Inc.
211 Congress Street
Boston, Massachusetts 02110
(Name and Address of Agent for Service)
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COPY TO:
Audrey C. Talley, Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3469
It is proposed that this filing become effective (check appropriate box):
[_] Immediately upon filing pursuant to Paragraph (b)
[_] on (date) pursuant to Paragraph (b)
[X] 60 days after filing pursuant to paragraph (a) (1)
[_] on (date) pursuant to paragraph (a) (1)
[_] 75 days after filing pursuant to Paragraph (a) (2)
[_] on (date) pursuant to Paragraph (a) (2) of Rule 485
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
<PAGE>
PART A
UAM FUNDS TRUST
The following prospectuses are included in this Post-Effective Amendment No. 31.
. BHM&S Total Return Bond Portfolio Institutional Class Shares
. BHM&S Total Return Bond Institutional Service Class Shares
. Cambiar Opportunity Portfolio
. Chicago Asset Management Intermediate Bond Portfolio
. Chicago Asset Management Value/Contrarian Portfolio
. Clipper Focus Portfolio
. FPA Crescent Portfolio Institutional Class Shares
. FPA Crescent Portfolio Advisor Class Shares
. Hanson Equity Portfolio
. Jacobs International Octagon Portfolio
. MJI International Equity Portfolio
. Pell Rudman Mid-Cap Growth Portfolio
. TJ Core Equity Portfolio
The following prospectuses are contained in Post-Effective Amendment No. 30,
filed on April 22, 1999.
. Heitman Real Estate Portfolio Institutional Class Shares
. Heitman Real Estate Portfolio Institutional Service Class Shares
The prospectus for Dwight Capital Preservation Portfolio is contained in Post-
Effective Amendment No. 29, filed on April 12, 1999.
<PAGE>
UAM Funds
Funds for the Informed Investor/sm/
BHM&S Total Return Bond Portfolio
Institutional Class Prospectus July 30, 1999
UAM
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio? ................................... 1
What are the Principal Investment Strategies of the Portfolio? ............ 1
What are the Principal Risks of the Portfolio? ............................ 1
How has the Portfolio Performed? .......................................... 2
What are the Fees and Expenses of the Portfolio? .......................... 3
Investing with the UAM Funds ................................................. 4
Buying Shares ............................................................. 4
Redeeming Shares .......................................................... 5
Exchanging Shares ......................................................... 5
Transaction Policies ...................................................... 5
Account Policies ............................................................. 8
Small Accounts ............................................................ 8
Distributions ............................................................. 8
Federal Taxes ............................................................. 8
Portfolio Details ........................................................... 10
Principal Investments and Risks of the Portfolio .......................... 10
Other Investment Practices and Strategies ................................. 12
Year 2000 ................................................................. 12
Investment Management ..................................................... 13
Shareholder Servicing Arrangements ........................................ 15
Additional Classes of Shares .............................................. 15
Financial Highlights ........................................................ 16
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
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The portfolio seeks maximum long-term total return consistent with reason-
able risk to principal by investing in investment grade fixed income secu-
rities of varying maturities. The portfolio cannot guarantee it will meet
its investment objective. The portfolio may not change its investment ob-
jective 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 invests at least 90% of its total assets in dollar-denomi-
nated investment-grade debt securities. The portfolio tries to maintain an
average weighted duration comparable to the Salomon Brothers' Broad or
Lehman Brothers Aggregate Indices, which is approximately five years.
The adviser actively manages the portfolio, focusing on security selec-
tion, sector concentration and yield curve positioning. The adviser be-
lieves that it can minimize volatility and generate superior returns over
the long-term by investing in undervalued securities with above-average
effective yields and capital appreciation potential. The adviser does not
attempt to "time the market."
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 a portfolio may
be worth more or less than the price that 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.
1
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BHM&S Total Return Bond Portfolio
Debt securities may lose value 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.
HOW HAS THE PORTFOLIO PERFORMED?
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The bar chart and table below illustrate how the performance of this class
of the portfolio has varied from year to year and provide some indication
of the risks of investing in the portfolio. The bar chart shows the in-
vestment returns of the portfolio for each full calendar year. The table
following the bar chart compares the average annual returns of the portfo-
lio to those of a broad-based securities market index. Past performance
does not guarantee future results.
Calendar Year Returns
[BAR GRAPH APPEARS HERE]
<TABLE>
<S> <C>
1996 3.48%
1997 8.83%
1998 7.41%
</TABLE>
<TABLE>
<CAPTION>
Quarter
Return Ended
--------------------------------------------------------
<S> <C> <C>
Highest quarter:
--------------------------------------------------------
Lowest Quarter
--------------------------------------------------------
Year-To-Date 6/30/99
</TABLE>
<TABLE>
<CAPTION>
Average Annual Returns
Since
Periods ended 12/31/98 1 Year Inception*
--------------------------------------------------------
<S> <C> <C>
BHM&S Total Return Bond Portfolio 7.41% 6.99%
--------------------------------------------------------
Lehman Brothers Aggregate Bond Index 8.69% 7.86%
</TABLE>
* The fund began operations 11/1/95. Index comparisons begin on 10/31/95.
2
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
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Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<CAPTION>
For the fiscal
year ended
4/30/99
-----------------------
<S> <C>
Management fees 0.35%
-----------------------
Other expenses
-----------------------
Total expenses 0.60%
</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 throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------
<S> <C> <C> <C>
</TABLE>
3
<PAGE>
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. wire your money to the UAM
Send your completed ac- Funds as follows:
count application 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: portfolio name/account number/
account name/wire control number
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By Automatic Not Available To set up a plan, mail a
Investment Plan completed application to
(Via ACH) 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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Minimum $2,500--regular account $100
Investments $500--IRAs
$250--spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
4
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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.
---------------------------------------------------------------------------
By Telephone 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.
EXCHANGING SHARES
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At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may only exchange shares between accounts with
identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
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Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. 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)
5
<PAGE>
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 At any
time, the UAM Funds may change or eliminate any of the redemption methods
described above, except redemption by mail.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds 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 subscription
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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. 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, the UAM Funds may allow you to pay for shares
with securities instead of cash. In addition, the UAM Funds may pay all or
part of your redemption proceeds 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
6
<PAGE>
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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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 it reasonably believes 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 tells the UAM Funds to delay redemptions.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
7
<PAGE>
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 50% of the required minimum initial invest-
ment. 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 distributes its net investment income quarterly.
In addition, the portfolio distributes its net capital gains once a year.
The UAM Funds will automatically reinvest dividends and distributions in
additional shares of the portfolio, unless you elect on your account ap-
plication to receive them in cash.
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 your investment. You should always consult your tax advisor for spe-
cific 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
8
<PAGE>
Taxes on Exchanges and Redemptions
When you exchange or redeem shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will 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.
9
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
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This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment strategies and their associated risks, please
read the "PORTFOLIO SUMMARY" and the SAI. You can find information on the
portfolio's recent strategies and holdings in its annual/semi-annual re-
port. As long as it is consistent with its objective and other policies
described in the SAI, the portfolio may change these strategies without
shareholder approval.
The portfolio invests at least 90% of its total assets in dollar-denomi-
nated investment-grade debt securities with an intermediate average matu-
rity. The portfolio maintains an average weighted duration comparable to
the Salomon Brothers' Broad or Lehman Brothers Aggregate Indices, which is
approximately five years. To manage its duration, the portfolio may hedge
its interest rate risk by purchasing and selling futures.
Investment Process
The adviser expects to manage the portfolio actively, focusing on security
selection, sector concentration and yield curve positioning. The adviser
invests the assets of the portfolio in securities, industry sectors and
maturity ranges that it believes the market has undervalued. The adviser
believes that it can minimize volatility and generate superior returns
over the long-term by:
. Investing in high quality securities that possess above-average effec-
tive yields and the potential for capital appreciation.
. Maintaining a conservative, intermediate maturity structure.
. Diversifying its assets along the yield curve.
The adviser does not attempt to time the market because it believes there
are too many variables to successfully forecast economic conditions con-
sistently.
The adviser's security selection process begins by analyzing the yield-to-
maturity premium of a bond (or spread) versus the most recently issued
U.S. treasury security of similar maturity. Once it identifies bonds with
an above-average premium, it then evaluates factors that could influence
the future premium such as credit quality, security structure and
supply/demand. The objective of this process is to identify those issues
whose yield premium will compress or narrow term performance.
10
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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 (dates when debt securities
are due and payable). Debt securities include securities issued by corpo-
rations and the U.S. government and its agencies, mortgage-backed and as-
set-backed securities (securities that are backed by pools of loans or
mortgages assembled for sale to investors), municipal notes and bonds,
Yankee 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 bond
will go down, and vice versa). Some types of debt securities are more af-
fected by changes in interest rates than others. For example, changes in
rates may cause people to pay off or refinance the loans underlying mort-
gage-backed and asset-backed securities earlier or later than expected,
which would shorten or lengthen the maturity of the security. This behav-
ior can negatively affect the performance of a portfolio by shortening or
lengthening its average maturity and, thus, changing its effective dura-
tion. The unexpected timing of mortgage backed and asset-backed prepay-
ments 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. To compensate investors for assuming
more risk, issuers with lower credit ratings usually offer their investors
higher "risk premium" in the form of higher interest rates than they would
find with a safer security, such as a U.S. Treasury security. However,
since the interest rate is fixed on a debt security at the time it is pur-
chased, investors reflect changes in confidence regarding the certainty of
interest and principal by adjusting the price they are willing to pay for
the security. This will affect the yield-to-maturity of the security. If
an issuer defaults or becomes unable to honor its financial obligations,
the security may lose some or all of its value.
11
<PAGE>
OTHER INVESTMENT PRACTICES AND STRATEGIES
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In addition to the principal investments described above, the portfolio
may invest in derivatives and may deviate from its investment strategies
from time to time. It may also employ investment practices that this pro-
spectus does not describe, such as repurchase agreements, when-issued and
forward commitment transactions, lending of securities, borrowing and
other techniques. For information concerning these investment practices
and their risks, you should read the SAI.
Derivatives
The portfolio may use including futures and options (types of derivatives)
to remain fully invested, to reduce transaction costs and to hedge inter-
est rates. 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.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
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.
12
<PAGE>
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
Barrow, Hanley, Mewhinney & Strauss, Inc., a Nevada corporation located at
70 West Madison Street, 56th Floor, Chicago, Illinois 60602, is the in-
vestment adviser to the portfolio. The adviser manages and supervises the
investment of the portfolio's assets on a discretionary basis. The advis-
er, an affiliate of United Asset Management Corporation, has specialized
in the active management of stocks, bonds and balanced portfolios for in-
stitutional and tax-exempt clients since 1979. The adviser currently pro-
vides and offers investment management services to corporate, public and
Taft-Hartley employee benefit plans, foundations, endowments, health care
and other institutions and investors.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees.
Portfolio Managers
A team of investment professionals is primarily responsible for the day-
to-day management of the portfolio. Listed below are the investment pro-
fessionals that comprise that team and a brief description of their busi-
ness experience.
<TABLE>
<CAPTION>
Manager Experience
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<C> <S>
John S. Williams Mr. Williams is currently a Fixed Income Principal of the
adviser. Mr. Williams joined the adviser as its first Fixed
Income Portfolio Manager in 1983. Mr. Williams has also
managed balanced and municipal portfolios during his 21-
year investment career. Before joining the adviser, he was
responsible for the management of all fixed income assets
at Southland Trust, Dallas, Texas, and before that was a
Portfolio Manager and Securities Analyst at InterFirst Bank
Dallas Trust Department. Mr. Williams has served on the Ad-
visory Committee for the Texas Teachers Retirement System
and is an active member in the Dallas Investment Analysts
Society. He currently is a Director of United Asset Manage-
ment Corporation. Mr. Williams is a Chartered Financial An-
alyst, earning his MBA in 1976 and BBA in 1975 from Texas
Christian University.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Manager Experience
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<C> <S>
David R. Hardin Mr. Hardin is currently a Fixed Income Principal and
Portfolio Manager of the adviser. Before joining the ad-
viser in 1987, Mr. Hardin was Vice President and Direc-
tor of the Fixed Income Group of RepublicBank Dallas
Trust Department. In that position, he was responsible
for the management of all taxable and tax-exempt fixed
income assets of the Trust Division, including all sepa-
rately managed accounts, collective investment fund
products, and the creation of and management of an SEC-
registered mutual fund. Before attaining the Director's
position, Mr. Hardin was a Taxable Portfolio Manager and
served as the Credit Analyst for the Trust Division. He
started his investment career as a private placement
credit analyst while employed by American General Insur-
ance Co. in Houston in 1976. Mr. Hardin received an
M.Sc. from the London School of Economics in 1975 and a
BBA from Texas Christian University in 1973.
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J. Scott McDonald Mr. McDonald is currently a Fixed Income Principal and
Portfolio Manager of the adviser. Mr. McDonald joined
the adviser in 1995 to serve as a Security and Portfolio
Specialist for the Fixed Income Group. In addition to
Security and Portfolio Analyst, he is responsible for
systems analytics used in the evaluation of
effective/option adjusted yield measurements for all se-
curities and portfolios. He also serves as compliance
monitor of all fixed income portfolios to ensure common-
ality of structure and diversification. Mr. McDonald
previously served as the Senior Vice President and Port-
folio Manager at Life Partners Group, Inc. in Dallas.
While with Life Partners, he was responsible for imple-
menting strategy for $3 billion in assets. Additionally,
Texas Commerce Bank Houston employed him as a Credit Su-
pervisor and Lending Officer. He received his MBA in
1991 from the University of Texas at Austin and his BBA
from Southern Methodist University in 1986.
-----------------------------------------------------------------------------
Mark C. Luchsinger Mr. Luchsinger is currently a Fixed Income Principal and
Portfolio Manager of the adviser. Mr. Luchsinger is the
newest senior member of the fixed income product team.
Before joining the adviser in April of 1997, he had
spent years in fixed income sales at First Boston Corpo-
ration, PaineWebber and Morgan Keegan, responsible for a
wide array of security and client types. During Mr.
Luchsinger's investment career, he has also served as
Chief Investment Officer for Great American Reserve In-
surance Company in Dallas, where he was responsible for
the management of over $1 billion in fixed income and
equity portfolios; Senior Investment Portfolio Manager
for Scor Reinsurance Company in Irving. Mr. Luchsinger
is a Chartered Financial Analyst and earned his BBA from
Bowling Green State University in 1980.
-----------------------------------------------------------------------------
Deborah J. Anderson Ms. Anderson is currently a Senior Portfolio Assistant
of the adviser. Ms. Anderson is responsible for all ad-
ministrative staff and their duties associated with the
fixed income product management, including
communication/liaison with all clients, custodial banks,
and brokerage relationships. She supervises all opera-
tional aspects of fixed income security trading and
works extensively with reporting requirements for all
clients and regulatory agencies. Before joining the ad-
viser in 1988, Ms. Anderson served as a Trust Officer
with Trust Company of Texas and its predecessor, South-
land Trust Co. She received a BBA in Accounting from the
University of Texas at Arlington in 1974.
</TABLE>
14
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Fees Paid by the UAM Funds to Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives 0.15% of the portion of the daily net asset value of Institutional
Class Shares held by Salomon Smith Barney's eligible customer accounts in
addition to amounts payable to all selling dealers. The UAM Funds also
compensate Salomon Smith Barney for services it provides to certain de-
fined contribution plan shareholders that are not otherwise provided by
the UAM Funds' administrator.
ADDITIONAL CLASSES OF SHARES
- -------------------------------------------------------------------------------
The portfolio also offers an Institutional Service Class shares, which pay
marketing or shareholder servicing fees.
15
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of this class of the portfolio for the fiscal periods
indicated. Certain information contained in the table reflects the finan-
cial results for a single portfolio share. The total returns in the table
represent the rate that an investor would have earned on an investment in
the portfolios assuming all dividends and distributions were reinvested.
has audited this information. The financial statements and the un-
qualified opinion of are included in the annual report of the portfo-
lio, which is available upon request by calling the UAM Funds at 1-877-
826-5465.
16
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
BHMSX 902556109 629
</TABLE>
<PAGE>
BHM&S Total Return Bond Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 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
Funds for the Informed Investor(sm)
BHM&S Total Return Bond Portfolio
Institutional Service Class Prospectus July 30, 1999
UAM
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio? ................................... 1
What are the Principal Investment Strategies of the Portfolio? ............ 1
What are the Principal Risks of the Portfolio? ............................ 1
How has the Portfolio Performed? .......................................... 3
What are the Fees and Expenses of the Portfolio?........................... 4
Investing with the Uam Funds ................................................. 5
Buying Shares ............................................................. 5
Redeeming Shares .......................................................... 6
Exchanging Shares ......................................................... 6
Transaction Policies ...................................................... 6
Account Policies ............................................................ 10
Small Accounts ............................................................ 10
Distributions ............................................................. 10
Federal Taxes ............................................................. 10
Portfolio Details ........................................................... 12
Principal Investments and Risks of the Portfolio .......................... 12
Other Investment Practices and Strategies ................................. 14
Year 2000 ................................................................. 14
Investment Management ..................................................... 15
Shareholder Servicing Arrangements ........................................ 17
Additional Classes of Shares .............................................. 18
Financial Highlights ........................................................ 19
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks maximum long-term total return consistent with reason-
able risk to principal by investing in investment grade fixed income secu-
rities of varying maturities. The portfolio cannot guarantee it will meet
its investment objective. The portfolio may not change its investment ob-
jective without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio invests at least 90% of its total assets in dollar-denomi-
nated investment-grade debt securities. The portfolio tries to maintain an
average weighted duration comparable to the Salomon Brothers' Broad or
Lehman Brothers Aggregate Indices, which is approximately five years.
The adviser actively manages the portfolio, focusing on security selec-
tion, sector concentration and yield curve positioning. The adviser be-
lieves that it can minimize volatility and generate superior returns over
the long-term by investing in undervalued securities with above-average
effective yields and capital appreciation potential. The adviser does not
attempt to "time the market."
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
1
<PAGE>
BHM&S Total Return Bond Portfolio
Debt securities may lose value 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.
2
<PAGE>
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of this class
of the portfolio has varied from year to year and provide some indication
of the risks of investing in the portfolio. The bar chart shows the in-
vestment returns of the portfolio for each full calendar year. The table
following the bar chart compares the average annual returns of the portfo-
lio to those of a broad-based securities market index. Past performance
does not guarantee future results.
Calendar Year Returns
<TABLE>
<CAPTION>
Quarter
Return Ended
--------------------------------
<S> <C> <C>
Highest Quarter 3.57% 6/30/97
--------------------------------
Lowest Quarter 4.58% 3/31/96
--------------------------------
Year-To-Date 6/30/99
</TABLE>
Average annual returns
<TABLE>
<CAPTION>
Since
Periods ended 12/31/98 1 Year Inception*
--------------------------------------------------------
<S> <C> <C>
BHM&S Total Return Bond Portfolio 7.15% 6.70%
--------------------------------------------------------
Lehman Brothers Aggregate Bond Index 8.69% 7.86%
</TABLE>
* The fund began operations 11/1/95. Index comparisons begin on 10/31/95.
3
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<CAPTION>
For the fiscal year
ended 4/30/99
----------------------------
<S> <C>
Management Fees 0.35%
----------------------------
Service (12b-1) Fees 0.25%
----------------------------
Other Expenses
----------------------------
Total Expenses 0.60%
</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 throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
----------------------------------
<S> <C> <C> <C>
</TABLE>
4
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows:
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Investment Plan (Via ACH)
Not Available To set up a plan, mail a
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.
---------------------------------------------------------------------------
Minimum Investments$2,500--regular account $100
$500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
5
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM Funds
account to 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may only exchange shares between accounts with
identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. The portfolio calculates its NAV as of the close of trading on the
6
<PAGE>
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 at the close
of trading on 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 UAM Funds 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 subscription
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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. 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, the UAM Funds may allow you to pay for shares
with securities instead of cash. In addition, the UAM Funds may pay all or
part of your redemption proceeds with securities instead of cash.
7
<PAGE>
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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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 it reasonably believes 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 tells the UAM Funds to delay redemptions.
8
<PAGE>
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
9
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income quarterly.
In addition, the portfolio distributes its net capital gains once a year.
The UAM Funds will automatically reinvest dividends and distributions in
additional shares of the portfolio, unless you elect on your account ap-
plication to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
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 your investment. You should always consult your tax advisor for spe-
cific 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
10
<PAGE>
constitutes a return of your investment. This is known as "buying into a
dividend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolio expects to make a distribution to shareholders.
Taxes on Exchanges and Redemptions
When you exchange or redeem shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will 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.
11
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment strategies and their associated risks, please
read the "PORTFOLIO SUMMARY" and the SAI. You can find information on the
portfolio's recent strategies and holdings in its annual/semi-annual re-
port. As long as it is consistent with its objective and other policies
described in the SAI, the portfolio may change these strategies without
shareholder approval.
The portfolio invests at least 90% of its total assets in dollar-denomi-
nated investment-grade debt securities with an intermediate average matu-
rity. The portfolio maintains an average weighted duration comparable to
the Salomon Brothers' Broad or Lehman Brothers Aggregate Indices, which is
approximately five years. To manage its duration, the portfolio may hedge
its interest rate risk by purchasing and selling futures.
Investment Process
The adviser expects to manage the portfolio actively, focusing on security
selection, sector concentration and yield curve positioning. The adviser
invests the assets of the portfolio in securities, industry sectors and
maturity ranges that it believes the market has undervalued. The adviser
believes that it can minimize volatility and generate superior returns
over the long-term by:
. Investing in high quality securities that possess above-average effec-
tive yields and the potential for capital appreciation.
. Maintaining a conservative, intermediate maturity structure.
. Diversifying its assets along the yield curve.
The adviser does not attempt to time the market because it believes there
are too many variables to successfully forecast economic conditions con-
sistently.
The adviser's security selection process begins by analyzing the yield-to-
maturity premium of a bond (or spread) versus the most recently issued
U.S. treasury security of similar maturity. Once it identifies bonds with
an above-average premium, it then evaluates factors that could influence
the future premium such as credit quality, security structure and
supply/demand. The objective of this process is to identify those issues
whose yield premium will compress or narrow term performance.
12
<PAGE>
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 (dates when debt securities
are due and payable). Debt securities include securities issued by corpo-
rations and the U.S. government and its agencies, mortgage-backed and as-
set-backed securities (securities that are backed by pools of loans or
mortgages assembled for sale to investors), municipal notes and bonds,
Yankee 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 bond
will go down, and vice versa). Some types of debt securities are more af-
fected by changes in interest rates than others. For example, changes in
rates may cause people to pay off or refinance the loans underlying mort-
gage-backed and asset-backed securities earlier or later than expected,
which would shorten or lengthen the maturity of the security. This behav-
ior can negatively affect the performance of a portfolio by shortening or
lengthening its average maturity and, thus, changing its effective dura-
tion. The unexpected timing of mortgage backed and asset-backed prepay-
ments 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. To compensate investors for assuming
more risk, issuers with lower credit ratings usually offer their investors
higher "risk premium" in the form of higher interest rates than they would
find with a safer security, such as a U.S. Treasury security. However,
since the interest rate is fixed on a debt security at the time it is pur-
chased, investors reflect changes in confidence regarding the certainty of
interest and principal by adjusting the price they are willing to pay for
the security. This will affect the yield-to-maturity of the security. If
an issuer defaults or becomes unable to honor its financial obligations,
the security may lose some or all of its value.
13
<PAGE>
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in derivatives and may deviate from its investment strategies
from time to time. It may also employ investment practices that this pro-
spectus does not describe, such as repurchase agreements, when-issued and
forward commitment transactions, lending of securities, borrowing and
other techniques. For information concerning these investment practices
and their risks, you should read the SAI.
Derivatives
The portfolio may use including futures and options (types of derivatives)
to remain fully invested, to reduce transaction costs and to hedge inter-
est rates. 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.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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 func-
14
<PAGE>
tions and could disrupt the operations of the UAM Funds or financial mar-
kets in general. The year 2000 issue affects all companies and organiza-
tions, including 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
- -------------------------------------------------------------------------------
Investment Adviser
Barrow, Hanley, Mewhinney & Strauss, Inc., a Nevada corporation located at
70 West Madison Street, 56th Floor, Chicago, Illinois 60602, is the in-
vestment adviser to the portfolio. The adviser manages and supervises the
investment of the portfolio's assets on a discretionary basis. The advis-
er, an affiliate of United Asset Management Corporation, has specialized
in the active management of stocks, bonds and balanced portfolios for in-
stitutional and tax-exempt clients since 1979. The adviser currently pro-
vides and offers investment management services to corporate, public and
Taft-Hartley employee benefit plans, foundations, endowments, health care
and other institutions and investors.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser % of its average net assets in management fees.
15
<PAGE>
Portfolio Managers
A team of investment professionals is primarily responsible for the day-
to-day management of the portfolio. Listed below are the investment pro-
fessionals that comprise that team and a brief description of their busi-
ness experience.
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
John S. Williams Mr. Williams is currently a Fixed Income Principal of the
adviser. Mr. Williams joined the adviser as its first
Fixed Income Portfolio Manager in 1983. Mr. Williams has
also managed balanced and municipal portfolios during his
21-year investment career. Before joining the adviser, he
was responsible for the management of all fixed income as-
sets at Southland Trust, Dallas, Texas, and before that
was a Portfolio Manager and Securities Analyst at
InterFirst Bank Dallas Trust Department. Mr. Williams has
served on the Advisory Committee for the Texas Teachers
Retirement System and is an active member in the Dallas
Investment Analysts Society. He currently is a Director of
United Asset Management Corporation. Mr. Williams is a
Chartered Financial Analyst, earning his MBA in 1976 and
BBA in 1975 from Texas Christian University.
-----------------------------------------------------------------------------
David R. Hardin Mr. Hardin is currently a Fixed Income Principal and Port-
folio Manager of the adviser. Before joining the adviser
in 1987, Mr. Hardin was Vice President and Director of the
Fixed Income Group of RepublicBank Dallas Trust Depart-
ment. In that position, he was responsible for the manage-
ment of all taxable and tax-exempt fixed income assets of
the Trust Division, including all separately managed ac-
counts, collective investment fund products, and the crea-
tion of and management of an SEC-registered mutual fund.
Before attaining the Director's position, Mr. Hardin was a
Taxable Portfolio Manager and served as the Credit Analyst
for the Trust Division. He started his investment career
as a private placement credit analyst while employed by
American General Insurance Co. in Houston in 1976. Mr.
Hardin received an M.Sc. from the London School of Econom-
ics in 1975 and a BBA from Texas Christian University in
1973.
-----------------------------------------------------------------------------
J. Scott McDonald Mr. McDonald is currently a Fixed Income Principal and
Portfolio Manager of the adviser. Mr. McDonald joined the
adviser in 1995 to serve as a Security and Portfolio Spe-
cialist for the Fixed Income Group. In addition to Secu-
rity And Portfolio Analyst, he is responsible for systems
analytics used in the evaluation of effective/option ad-
justed yield measurements for all securities and portfo-
lios. He also serves as compliance monitor of all fixed
income portfolios to ensure commonality of structure and
diversification. Mr. McDonald previously served as the Se-
nior Vice President and Portfolio Manager at Life Partners
Group, Inc. in Dallas. While with Life Partners, he was
responsible for implementing strategy for $3 billion in
assets. Additionally, Texas Commerce Bank Houston employed
him as a Credit Supervisor and Lending Officer. He re-
ceived his MBA in 1991 from the University of Texas at
Austin and his BBA from Southern Methodist University in
1986.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Mark C. Luchsinger Mr. Luchsinger is currently a Fixed Income Principal and
Portfolio Manager of the adviser. Mr. Luchsinger is the
newest senior member of the fixed income product team.
Before joining the adviser in April of 1997, he had
spent years in fixed income sales at First Boston Corpo-
ration, PaineWebber and Morgan Keegan responsible for a
wide array of security and client types. During Mr.
Luchsinger's investment career, he has also served as
Chief Investment Officer for Great American Reserve In-
surance Company in Dallas, where he was responsible for
the management of over $1 billion in fixed income and
equity portfolios; Senior Investment Portfolio Manager
for Scor Reinsurance Company in Irving. Mr. Luchsinger
is a Chartered Financial Analyst and earned his BBA from
Bowling Green State University in 1980.
-----------------------------------------------------------------------------
Deborah J. Anderson Ms. Anderson is currently a Senior Portfolio Assistant
of the adviser. Ms. Anderson is responsible for all ad-
ministrative staff and their duties associated with the
fixed income product management, including
communication/liaison with all clients, custodial banks,
and brokerage relationships. She supervises all opera-
tional aspects of fixed income security trading and
works extensively with reporting requirements for all
clients and regulatory agencies. Before joining the ad-
viser in 1988, Ms. Anderson served as a Trust Officer
with Trust Company of Texas and its predecessor, South-
land Trust Co. She received a BBA in Accounting from the
University of Texas at Arlington in 1974.
</TABLE>
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Distribution Plans
The UAM Funds have adopted a Distribution Plan and a Shareholder Services
Plan under Rule 12b1 of the Investment Company Act of 1940 that permit
them to pay broker-dealers, financial institutions and other third parties
for marketing, distribution and shareholder services. The UAM Funds' 12b-1
plans allow them to pay up to 1.00% of its average daily net assets annu-
ally for these services. However, they are currently authorized to pay
only 0.25% per year. Because Institutional Service Class Shares pay these
fees out of their assets on an ongoing basis, over time, your shares may
cost more than if you had paid another type of sales charge. Long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by rules of the National Association of
Securities Dealers, Inc.
17
<PAGE>
Fees Paid by the UAM Funds to Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives from such entities an amount equal to up to 33.3% of the portion of
the investment advisory fees attributable to the invested assets of Salo-
mon Smith Barney's eligible customer accounts without regard to any ex-
pense limitation in addition to amounts payable to all selling dealers.
The UAM Funds also compensate Salomon Smith Barney for services it pro-
vides to certain defined contribution plan shareholders that are not oth-
erwise provided by the UAM Funds' administrator.
ADDITIONAL CLASSES OF SHARES
- -------------------------------------------------------------------------------
The portfolio also offers an Institutional Class shares, which do not pay
marketing or shareholder servicing fees.
18
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of this class of the portfolio for the fiscal periods
indicated. Certain information contained in the table reflects the finan-
cial results for a single portfolio share. The total returns in the table
represent the rate that an investor would have earned on an investment in
the portfolios assuming all dividends and distributions were reinvested.
has audited this information. The financial statements and the un-
qualified opinion of are included in the annual report of the portfo-
lio, which is available upon request by calling the UAM Funds at 1-877-
826-5465.
19
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
BHYYX 902556208 630
</TABLE>
<PAGE>
BHM&S Total Return Bond Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 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
Funds for the Informed Investor(SM)
Cambiar Opportunity Portfolio
Institutional Class Prospectus July 31, 1999
UAM(R)
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio?.................................... 1
What are the Principal Investment Strategies of the Portfolio?............. 1
What are the Principal Risks of the Portfolio?............................. 1
What are the Fees and Expenses of the Portfolio?........................... 3
Investing with the UAM Funds ................................................. 4
Buying Shares.............................................................. 4
Redeeming Shares........................................................... 5
Exchanging Shares.......................................................... 5
Transaction Policies....................................................... 6
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.................................. 12
Year 2000.................................................................. 14
Investment Management...................................................... 14
Shareholder Servicing Arrangements......................................... 16
Financial Highlights ........................................................ 18
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks capital growth and preservation by investing primarily
in common stocks. The portfolio cannot guarantee it will meet its invest-
ment objective. The portfolio may not change its investment objective
without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
Normally, the portfolio invests at least 65% of its total assets in common
stocks of mid- to large sized companies. The adviser looks for financially
strong companies:
. Undergoing positive developments that the market has not yet recog-
nized.
. Selling at historically low prices.
. Having seasoned management.
. Enjoying product or market advantages.
The adviser uses a team approach that focuses first on individual stocks
and then on industries or sectors (groups of related industries) of the
economy.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
1
<PAGE>
. 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.
Cambiar Opportunity Portfolio
The portfolio's main risks are those associated with investing in equity
securities.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or a particu-
lar company.
2
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<S> <C>
For the fiscal year ended
4/30/99@
-----------------------------------
Management Fees 1.00%
-----------------------------------
Other Expenses
-----------------------------------
Total Expenses* 1.00%
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolio. Due to certain expense limits by the adviser and expense off-
sets, investors in the portfolio actually paid the total operating ex-
penses listed in the table below. The adviser may change or cancel its
expense limitation at any time.
<TABLE>
<S> <C>
For the fiscal year ended
4/30/99
-----------------------------------
Actual Expenses 1.30%
</TABLE>
@ The portfolio began operation on June 30, 1998.
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 5 Years 10 Years
----------------------------------
<S> <C> <C> <C>
</TABLE>
3
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows.
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Investment Plan (Via ACH)
Not Available To set up a plan, mail a
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.
---------------------------------------------------------------------------
MinimumInvestments $2,500--regular account $100
$500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
4
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may not exchange shares represented by certif-
icates over the telephone. You may only exchange shares between accounts
with identical registrations (i.e., the same names and addresses).
5
<PAGE>
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. 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) on each
day the NYSE is open. Therefore, to receive the NAV on any given day, the
UAM Funds must accept your order by 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.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy, exchange or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy
or sell shares at the NAV of any given day your financial intermediary
must receive your order by the close of trading on the NYSE that day. Your
financial intermediary is responsible for transmitting all subscription
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 NAV 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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair
6
<PAGE>
value when events occur that make established valuation methods (such as
stock exchange closing prices) unreliable. The UAM Funds value debt secu-
rities that will mature in 60 days or less at amortized cost, which ap-
proximates market value.
In-Kind Transactions
Under certain conditions, the UAM Funds may allow to pay for shares with
securities instead of cash. In addition, the UAM Funds may pay all or part
of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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; they may be liable for any
losses if they fail to do so. The UAM Funds will not be responsible for
any loss, liability, cost or expense for following instructions received
by telephone that it reasonably believes 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.
7
<PAGE>
. 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.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
8
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income quarterly.
In addition, it distributes its net capital gains once a year. The UAM
Funds will automatically reinvest dividends and distributions in addi-
tional shares of the portfolio, unless you elect on your account applica-
tion to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in this portfolio. You may also have to pay state and local taxes
on your investment. You should always consult your tax advisor for spe-
cific 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
9
<PAGE>
constitutes a return of your investment. This is known as "buying into a
dividend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolio expects to make a distribution to shareholders.
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
10
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment practices and their associated risks, please read
the "PORTFOLIO SUMMARY" and the statement of additional information (SAI).
You can find information on the portfolio's recent strategies and holdings
in its annual/semi-annual report. As long as it is consistent with its ob-
jective, the portfolio may change these strategies without shareholder ap-
proval.
Normally, the portfolio invests at least 65% of its total assets in common
stocks of companies that are relatively large in terms of revenues, assets
and market capitalization (typically over $500 million at the time of ini-
tial purchase). The portfolio may also invest in other types of equity
securities.
Investment Process
The adviser's investment professionals work as a team to develop invest-
ment ideas by analyzing company and industry statements, monitoring Wall
Street and other research sources and interviewing company management. It
also evaluates economic conditions and fiscal and monetary policies.
The adviser's approach focuses first on individual stocks and then on in-
dustries or sectors (groups of related industries). The adviser does
not attempt to time the market. The adviser's tries to select quality
companies:
. Possessing above-average financial characteristics.
. Having seasoned management.
. Enjoying product or market advantages.
. Whose stock is selling at a relatively low price based on historical
price-to-earnings, price-to-book, price-to-sales and price-to-cash
flow ratios.
. Experiencing positive developments not yet recognized by the markets,
such as positive changes in management, improved margins, corporate
restructuring or new products.
. Possessing the potential to appreciate by 50% within 12 to 18 months.
11
<PAGE>
The portfolio may sell a stock because:
. It realizes positive developments and achieves its target price.
. Its price moves too far too fast.
. It becomes overweighted.
. The positive developments the adviser expected fail to unfold.
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry, such as increases
in production costs, or factors directly related to a specific company,
such as decisions made by its management.
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in foreign securities and derivatives and may deviate from its
investment strategy from time to time. It may also employ investment prac-
tices that this prospectus does not describe, such as repurchase agree-
ments, when-issued and forward commitment transactions, lending of securi-
ties, borrowing and other techniques. For information concerning these in-
vestment practices and their risks, you should read the SAI.
American Depositary Receipts (ADRs)
The portfolio may invest up to 25% of its assets in ADRs. ADRs are certif-
icates evidencing ownership of shares of a foreign issuer that are issued
by depository banks and generally trade on an established market in the
United States or elsewhere. Although they are alternatives to directly
purchasing the underlying foreign securities in their national markets and
currencies, ADRs continue to be subject to many of the risks associated
with investing directly in foreign securities.
12
<PAGE>
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Changes in tax and accounting standards and diffi-
culties obtaining information about foreign companies can negatively af-
fect investment decisions.
In January 1999, certain European nations began to use the new European
common currency, called the Euro. The nations that use the Euro will have
the same monetary policy regardless of their domestic economy, which could
have adverse effects on those economies. In addition, difficulties in con-
verting to the Euro could negatively affect the investments of a portfo-
lio.
Derivatives
The portfolio may use derivatives, including futures and options, to re-
main fully invested or reduce transaction costs. 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.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
13
<PAGE>
YEAR 2000
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
Investment Adviser
Cambiar Investors, Inc., a Colorado corporation located at 8400 East Pren-
tice Avenue, Suite 460, Englewood, Colorado 80111, is the investment ad-
viser to the portfolio. The adviser manages and supervises the investment
of the portfolio's assets on a discretionary basis. The adviser, an affil-
iate of United Asset Management Corporation, has provided investment man-
agement services to corporations, foundations, endowments, pension and
profit sharing plans, trusts, estates and other institutions as well as
individuals since 1973.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition, the
adviser has voluntarily agreed to limit the expenses of the portfolio to
1.30% of its average net assets. To maintain this expense limit, the ad-
viser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. The adviser intends to continue its expense
limitation until further notice.
Portfolio Managers
A team of investment professionals is primarily responsible for the day-
to-day management of the portfolio. Listed below are the investment pro-
14
<PAGE>
fessionals that comprise that team and a brief description of their busi-
ness experience.
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Michael S. Barish, CFA President and Founder of the adviser since 1973.
-----------------------------------------------------------------------------
Kathleen M. McCarty, CFA Ms. McCarty joined the adviser in 1987 and she is
currently a Senior Vice President and Portfolio
Manager.
-----------------------------------------------------------------------------
Michael J. Gardener, CFA Mr. Gardner joined the adviser in 1995 and he is
currently a Vice President and Portfolio Manager.
From 1991-1995, he was an Equity Research Analyst
with Simmons & Company.
-----------------------------------------------------------------------------
Brian M. Barish, CFA Mr. Barish joined the adviser in 1997 as Vice Pres-
ident and Portfolio Manager. From 1993 to 1997, he
was Vice President and Director of Emerging Markets
at Lazard Freres & Co. LLC. From 1992-1993, he Mr.
Barish was an analyst at Bear Stearns.
-----------------------------------------------------------------------------
Maria L. Azari, CFA Ms. Azari joined the adviser in 1997 and she is
currently a Vice President and Portfolio Manager.
From 1992-1997, she was an Investment Analyst at
Eaton Vance Management.
</TABLE>
Adviser's Historical Performance
The adviser manages separate accounts that have the same investment objec-
tives as the portfolio. The adviser manages these accounts using tech-
niques and strategies substantially similar, though not always identical,
to those used to manage the portfolio. A composite of the performance of
these separate accounts is listed below. The performance data for the man-
aged accounts reflects deductions for all fees and expenses. All fees and
expenses of the separate accounts were less than the operating expenses of
the portfolio. If the performance of the managed accounts was adjusted to
reflect the fees and expenses of the portfolio, the composite's perfor-
mance would have been lower.
The adviser calculated its performance using the standards of the Associa-
tion for Investment Management and Research. Had the adviser calculated
its performance using the SEC's methods, it results might have differed.
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.
15
<PAGE>
<TABLE>
<CAPTION>
Cambiar Investors, Inc.
Composite Returns* S&P 500 Index
----------------------------------------------------------------------------------
<S> <C> <C>
Calendar Years Ended:
----------------------------------------------------------------------------------
1975 34.80% 37.20%
----------------------------------------------------------------------------------
1976 32.40% 23.80%
----------------------------------------------------------------------------------
1977 14.40% (7.20)%
----------------------------------------------------------------------------------
1978 22.50% 6.60%
----------------------------------------------------------------------------------
1979 24.00% 18.40%
----------------------------------------------------------------------------------
1980 25.50% 32.40%
----------------------------------------------------------------------------------
1981 9.80% (4.90)%
----------------------------------------------------------------------------------
1982 33.30% 21.60%
----------------------------------------------------------------------------------
1983 22.60% 22.40%
----------------------------------------------------------------------------------
1984 2.90% 6.10%
----------------------------------------------------------------------------------
1985 29.30% 31.57%
----------------------------------------------------------------------------------
1986 23.67% 18.21%
----------------------------------------------------------------------------------
1987 6.10% 5.17%
----------------------------------------------------------------------------------
1988 17.11% 16.50%
----------------------------------------------------------------------------------
1989 23.23% 31.43%
----------------------------------------------------------------------------------
1990 2.83% (3.19)%
----------------------------------------------------------------------------------
1991 31.51% 30.55%
----------------------------------------------------------------------------------
1992 9.56% 7.68%
----------------------------------------------------------------------------------
1993 13.66% 10.00%
----------------------------------------------------------------------------------
1994 1.00% 1.33%
----------------------------------------------------------------------------------
1995 33.54% 37.50%
----------------------------------------------------------------------------------
1996 23.92% 23.25%
----------------------------------------------------------------------------------
1997 33.65% 33.36%
----------------------------------------------------------------------------------
1998
----------------------------------------------------------------------------------
Average Annual Retunrs for the periods ended / /
1-year
----------------------------------------------------------------------------------
5-years
----------------------------------------------------------------------------------
10-years
Cumulative Since Inception (1/1/75)
</TABLE>
* During the period shown (1/1/75- / / ), fees on the adviser's individual
accounts ranged from 0.25% to 2.0%. The adviser's returns presented
above are net of the maximum fee of 2.0%. Net returns to investors vary
depending on the management fee.
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
16
<PAGE>
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
17
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of the portfolio for the fiscal periods indicated.
Certain information contained in the table reflects the financial results
for a single portfolio share. The total returns in the table represent the
rate that an investor would have earned on an investment in the portfolios
assuming all dividends and distributions were reinvested. has au-
dited this information. The financial statements and the unqualified opin-
ion of are included in the annual report of the portfolio, which is
available upon request by calling the UAM Funds at 1-877-826-5465.
18
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
N/A 902555408 637
</TABLE>
<PAGE>
Cambiar Opportunity Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolios and
is incorporated by reference into (legally part of) this prospectus.
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 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 funds' Investment Company Act of 1940 file number is 811-8544.
[UAM LOGO APPEARS HERE]
<PAGE>
UAM Funds
Funds for the Informed Investor/sm/
Chicago Asset Management Portfolios
Institutional Class Prospectus July 30, 1999
Chicago Asset Management Intermediate Bond Portfolio
Chicago Asset Management Value/Contrarian
UAM
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What are the Objectives of the Portfolios? ................................ 1
What are the Principal Investment Strategies of the Portfolios? ........... 1
What are the Principal Risks of the Portfolios? ........................... 2
How have the Portfolios Performed? ........................................ 4
What are the Fees and Expenses of the Portfolios? ......................... 6
Investing with the UAM Funds ................................................. 7
Buying Shares ............................................................. 7
Redeeming Shares .......................................................... 8
Exchanging Shares ......................................................... 8
Transaction Policies ...................................................... 8
Account Policies ............................................................ 12
Small Accounts ............................................................ 12
Distributions ............................................................. 12
Federal Taxes ............................................................. 12
Portfolio Details ........................................................... 14
Principal Investments and Risks of the Portfolios ......................... 14
Other Investment Practices and Strategies ................................. 17
Year 2000 ................................................................. 19
Investment Management ..................................................... 20
Shareholder Servicing Arrangements ........................................ 23
Financial Highlights ........................................................ 25
</TABLE>
<PAGE>
Portfolio Summary
WHAT ARE THE OBJECTIVES OF THE PORTFOLIOS?
- -------------------------------------------------------------------------------
Listed below are the investment objectives of the portfolios. The portfo-
lios cannot guarantee they will meet their investment objectives. A port-
folio may not change its investment objective without shareholder approv-
al.
Intermediate Bond Portfolio
The portfolio seeks a high level of current income consistent with moder-
ate interest rate exposure by investing primarily in investment-grade
bonds with an average weighted maturity between 3 and 10 years.
Value/Contrarian Portfolio
The portfolio seeks capital appreciation by investing in the common stock
of large companies.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIOS?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lios. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIOS."
Intermediate Bond Portfolio
The portfolio normally invests at least 65% of its total assets in invest-
ment-grade debt securities with maturities that range from 3 to 10 years.
The adviser manages the portfolio to limit the risk of investing in the
bond market and to offer some protection from changes in the prices (vola-
tility) of debt securities. The adviser does not attempt to forecast in-
terest rates. The adviser believes it can add to the return of the portfo-
lio by:
. Taking an approach that is the opposite of what most investors are
doing at a particular time (a "contrarian" approach).
. Focusing its efforts on the more traditional aspects of portfolio
management, such as sector valuations, coupons, call features and the
shape of the yield curve.
Value/Contrarian Portfolio
The portfolio seeks to outperform the market by investing primarily in
common stocks of large, high-quality companies whose stocks are selling
1
<PAGE>
at attractive prices due to short-term market misperceptions. The invest-
ment approach of the adviser focuses on individual stocks rather than in-
dustries or sectors of the economy. The adviser attempts to pick stocks:
. That it believes the market has priced below their true value because
of a failure to recognize the potential of the stock or value of the
company.
. Of companies that are currently out-of-favor (typically, rated as
"hold" or "sell" by most analysts), but present strong long-term
opportunities.
The adviser does not attempt to time the market.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIOS?
- -------------------------------------------------------------------------------
This section summarizes the principal risks associated with investing in
the portfolios. For more information see "PRINCIPAL INVESTMENTS AND RISKS
OF THE PORTFOLIOS."
Risks Common to All Mutual Funds
As with all mutual funds, at any time your investment in a portfolio may
be worth more or less than the price that 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
unpredictably.
. 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.
Intermediate Bond Portfolio
The portfolio's main risks are those associated with investing in debt se-
curities using a value oriented approach.
Debt securities may lose value 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.
2
<PAGE>
Value/Contrarian Portfolio
The portfolio's main risks are those associated with investing in equity
securities using a value oriented approach.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or sector or
a particular company.
Intermediate Bond Portfolio and Value/Contrarian Portfolio
Since the adviser selects securities for each portfolio using a value ori-
ented approach, each portfolio takes on the risks that are associated a
value oriented investment approach.
Value oriented mutual funds may not perform as well as certain other types
of equity mutual funds during periods when value stocks are out of favor.
3
<PAGE>
HOW HAVE THE PORTFOLIOS PERFORMED?
- -------------------------------------------------------------------------------
The bar charts and tables below illustrate how the performance of each
portfolio has varied from year to year and provide some indication of the
risks of investing in the portfolios. The bar chart shows the investment
returns of each portfolio for each full calendar year. The table following
the bar chart compares the average annual returns of each portfolio to
those of a broad-based securities market index. Past performance does not
guarantee future results.
Intermediate Bond Portfolio
Calendar Year Returns
[BAR GRAPH APPEARS HERE]
<TABLE>
<S> <C>
1996 3.22%
1997 7.19%
1998 7.34%
</TABLE>
Returns Chart Appears Here
<TABLE>
<CAPTION>
Quarter
Return Ended
--------------------------------
<S> <C> <C>
Highest Quarter 5.38% 6/30/95
--------------------------------
Lowest Quarter 0.94% 3/31/96
--------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Since
Average annual return for periods ended 12/31/98 1 Year Inception*
---------------------------------------------------------------------------
<S> <C> <C>
Intermediate Bond Portfolio 7.34% 7.93%
---------------------------------------------------------------------------
Lehman Brothers Intermediate Government/ Corporate Bond
Index 8.44% 8.85%
</TABLE>
*The portfolio began operations 1/24/95. Index comparisons begin on
1/31/95.
4
<PAGE>
Value/Contrarian Portfolio
Calendar Year Returns
[Returns Chart Appears Here]
<TABLE>
<S> <C>
1995 27.88%
1996 13.81%
1997 18.90%
1998 15.86%
</TABLE>
<TABLE>
<CAPTION>
Quarter
Return Ended
--------------------------------
<S> <C> <C>
Highest Quarter 12.42% 6/30/97
--------------------------------
Lowest Quarter 8.80% 9/30/98
--------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Since
Average annual return for periods ended 12/31/98 1 Year Inception*
---------------------------------------------------------------------
<S> <C> <C>
Value/Contrarian Portfolio 16.17% 19.22%
---------------------------------------------------------------------
S%P 500 Index 28.60% 30.49%
</TABLE>
*The portfolio began operations 12/16/94. Index comparisons begin on
12/31/94.
5
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIOS?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolios.
<TABLE>
<CAPTION>
For the Fiscal Year Intermediate Bond Value/Contrarian
Ended 4/30/99 Portfolio Portfolio
---------------------------------------------------------
<S> <C> <C>
Management Fees 0.48% 0.625%
---------------------------------------------------------
Other Expenses
---------------------------------------------------------
Total Expenses* 0.48% 0.625%
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolios. Due to certain expense limits by the adviser and expense
offsets, investors in the portfolios actually paid the total operating
expenses listed in the table below. The adviser may change or cancel its
expense limitation at any time.
<TABLE>
<CAPTION>
For the Fiscal Year Intermediate Bond Value/Contrarian
Ended 4/30/99 Portfolio Portfolio
---------------------------------------------------------
<S> <C> <C>
Actual Expenses 0.80% 1.25%
</TABLE>
Example
This example can help you to compare the cost of investing in these port-
folios to the cost of investing in other mutual funds. The example assumes
you invest $10,000 in a 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 5 Years 10 Years
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Intermediate Bond Portfolio
-------------------------------------------------------------
Value/Contrarian Portfolio
</TABLE>
6
<PAGE>
INVESTING WITH THE UAM FUNDS
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic
Investment Plan
(Via ACH) Not Available To set up a plan, mail a
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.
---------------------------------------------------------------------------
Minimum
Investments $2,000--regular account $100
$500--IRAs
$250--spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
7
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may only exchange shares between accounts with
identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your
8
<PAGE>
order. The portfolios calculate their NAVs 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
business on the same days as the NYSE, which is closed on weekends and na-
tional holidays.
Securities that are traded on foreign exchanges may trade on days when a
portfolio does not price its shares. Consequently, the value of the port-
folios may change on days when you are unable to purchase or redeem shares
of the portfolios.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds 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 subscription
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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. The UAM Funds value debt securities
that will mature in 60 days or less at amortized cost, which approximates
market value.
9
<PAGE>
In-Kind Transactions
Under certain conditions, the UAM Funds may allow you to pay for shares
with securities instead of cash. In addition, the UAM Funds may pay all or
part of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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 it reasonably believes 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
expenses.)
10
<PAGE>
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.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
11
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. This provision does not apply:
. To retirement accounts and certain other accounts.
. When the value of your account falls below the required minimum
because 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
- -------------------------------------------------------------------------------
Normally, the portfolios distribute their net investment income quarterly.
In addition, the portfolios distribute any net capital gains once a year.
The UAM Funds will automatically reinvest dividends and distributions in
additional shares of the portfolios, unless you elect on your account ap-
plication to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in these portfolios. You may also have to pay state and local
taxes on 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 portfolios will generally be taxable to share-
holders as ordinary income or capital gains (which may be taxable at dif-
ferent rates depending on the length of time the portfolio held the rele-
vant assets). You will be subject to income tax on these distributions re-
gardless 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
12
<PAGE>
constitutes a return of your investment. This is known as "buying into a
dividend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolios expect to make a distribution to shareholders.
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolios invest in foreign securities, they may be
subject to foreign withholding taxes with respect to dividends or interest
the portfolios received from sources in foreign countries. The portfolios
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
13
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolios may employ in seeking their objectives. For more information
concerning these investment practices and their associated risks, please
read the "PORTFOLIO SUMMARY" and the SAI. You can find information on each
portfolio's recent strategies and holdings in the annual report. As long
as it is consistent with their objectives and other policies described in
the SAI, each portfolio may change these strategies without shareholder
approval.
Intermediate Bond Portfolio
The portfolio normally invests at least 65% of its total assets in
investment-grade debt securities with maturities that range from 3 to 10
years. The portfolio also may invest up to 10% of its assets in debt secu-
rities rated below investment-grade (junk bonds).
Investment Process
The adviser manages the portfolio to limit the risk of investing in the
bond market and to offer some protection from changes in the prices (vola-
tility) of debt securities. Since many different factors affect bond pric-
es, bond fund managers have historically found it difficult to outperform
a bond market index. The adviser believes this is particularly true of
bond fund managers that try to anticipate interest rates. To avoid wide
variations in performance that tend to accompany interest rate predic-
tions, the adviser does not attempt to forecast interest rates.
At market tops and bottoms, market psychology tends to drive bond prices
to extremes, overshooting their long-term equilibrium levels. Consequent-
ly, "conventional wisdom" about a given security or sector's price move-
ment or relative value is often wrong. The adviser believes it can to add
to the return of the portfolio by:
. Taking an approach that is the opposite of what most investors are
doing at a particular time (a "contrarian" approach).
. Focusing its efforts on the more traditional aspects of portfolio
management, such as sector valuations, coupons, call features and the
shape of the yield curve.
14
<PAGE>
Debt Securities
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 bond
will go down, and vice versa). Some types of debt securities are more af-
fected by changes in interest rates than others. For example, changes in
rates may cause people to pay off or refinance the loans underlying mort-
gage-backed and asset-backed securities earlier or later than expected,
which would shorten or lengthen the maturity of the security. This behav-
ior can negatively affect the performance of a portfolio by shortening or
lengthening its average maturity and, thus, changing its effective dura-
tion. The unexpected timing of mortgage backed and asset-backed prepay-
ments 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. To compensate investors for assuming
more risk, issuers with lower credit ratings usually offer their investors
higher "risk premium" in the form of higher interest rates than they would
find with a safer security, such as a U.S. Treasury security. However,
since the interest rate is fixed on a debt security at the time it is pur-
chased, investors reflect changes in confidence regarding the certainty of
interest and principal by adjusting the price they are willing to pay for
the security. This will affect the yield-to-maturity of the security. If
an issuer defaults or becomes unable to honor its financial obligations,
the security may lose some or all of its value.
A security rated within the four highest rating categories by a rating
agency is called investment-grade because its issuer is more likely to pay
interest and repay principal than an issuer of a lower rated bond. Adverse
economic conditions or changing circumstances, however, may weaken the ca-
pacity 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.
15
<PAGE>
Value Contrarian Portfolio
The portfolio invests primarily in common stocks of companies with large
market capitalizations (typically over $1 billion at the time of pur-
chase). The portfolio also may invest in other types of equity securities.
Investment Process
The portfolio seeks to outperform the market by identifying attractive
stocks, but not by attempting to time the market (i.e., trying to taking
advantage of shifts in the overall direction of the market). The portfolio
invests primarily in established, high-quality companies whose stock is
selling at attractive prices due to short-term market misperceptions.
The portfolio generally weights each of the equity securities it holds
equally. The adviser regularly monitors the market value of each security
the portfolio holds and will buy or sell shares of a particular security
depending on whether the portion of the portfolio represented by that se-
curity decreases or increases.
The investment philosophy and process of the adviser is qualitative rather
than quantitative. In investing the assets of the portfolio, the adviser:
. Focuses on individual stocks rather than industry groups or sectors or
on trying to forecast the overall strength of the stock market. The
adviser looks for companies that are market leaders with sound balance
sheets and capable, experienced management.
. Tries to invest in stocks that the market has priced below their true
value because of a failure to recognize the potential of the stock or
value of the company. At the time of initial investment, these stocks
typically trade below the mid-point of the price range for the last 12
months.
. Looks for out-of-favor companies (typically, rated as "hold" or "sell"
by most analysts) that present strong long-term opportunities. The
adviser believes the market overreacts to temporary bad news. By
closely monitoring research analysts, market commentators and others
and then evaluating the impact of their opinions on stock prices, the
adviser attempts to determine whether the market has properly valued a
particular stock.
The adviser generally sells a stock:
. When it reaches the price objective the adviser has set for the stock.
. If the fundamental business operation or financial stability of the
company turns negative.
16
<PAGE>
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry or sector, such as
increases in production costs, or factors directly related to a specific
company, such as decisions made by its management.
Undervalued companies may have experienced adverse business developments
or other events that have caused their stocks to be out of favor. If the
adviser's assessment of a company is wrong, or if the market does not rec-
ognize the value of the company, the price of its stock may fail to meet
expectations and the portfolio's share price may suffer. A value-oriented
portfolio may not perform as well as certain other types of mutual funds
during periods when value stocks are out of favor.
Derivatives
The portfolios may use various derivatives, including futures, forward
foreign currency exchange contracts, options and swaps to hedge their in-
vestments. 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.
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolios
may invest in derivatives and foreign securities and may deviate from its
investment strategy from time to time. They may also employ investment
practices that this prospectus does not describe, such as repurchase
17
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading CUSIP Portfolio
Symbol Number Number
---------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Portfolio CAMBX 902556406 635
---------------------------------------------------------
Value/Contrarian Portfolio CAMEX 902556307 636
</TABLE>
<PAGE>
Chicago Asset Management Portfolios
For investors who want more information about the portfolios, the follow-
ing documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolios provide additional
information about their investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolios during their last fis-
cal year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolios and
is incorporated by reference into (legally part of) this prospectus.
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 the reports of the portfolios 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
Funds for the Informed Investor(SM)
Clipper focus Portfolio
Institutional Class Prospectus July 31, 1999
UAM(R)
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio? ................................... 1
What are the Principal Investment Strategies of the Portfolio? ............ 1
What are the Principal Risks of the Portfolio? ............................ 1
What are the Fees and Expenses of the Portfolio? .......................... 3
Investing with the UAM Funds ................................................. 4
Buying Shares ............................................................. 4
Redeeming Shares .......................................................... 5
Exchanging 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 ................................. 12
Year 2000 ................................................................. 13
Investment Management ..................................................... 14
Shareholder Servicing Arrangements ........................................ 16
Financial Highlights ........................................................ 18
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks long-term capital growth. The portfolio cannot guaran-
tee it will meet its investment objective. The portfolio may change its
investment objective without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The adviser focuses on dominant companies that:
. Have leading market positions.
. Generate excess cash flow.
. Have experienced and focused management.
. Are in industries that are often "out-of-favor" in the investment com-
munity.
The adviser invests like a long-term business partner would invest--it
values a company's assets, projects long-term free cash flows and seeks
shareholder-oriented management. The adviser's investment process is very
research intensive and includes:
. Meeting with company management, competitors and customers.
. Preparing detailed valuation models to identify companies whose stock
is undervalued compared to the company's intrinsic value.
The portfolio is a nondiversified mutual fund that generally holds between
15 to 35 stocks. The adviser believes that concentrating the investments
of the portfolio in the adviser's best investment ideas will produce supe-
rior long-term performance.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal risks associated with investing in
the portfolio. For more information see "PRINCIPAL INVESTMENTS AND RISKS
OF THE PORTFOLIO."
1
<PAGE>
Risks Common to All Mutual Funds
As with all mutual funds, at any time your investment in a portfolio may
be worth more or less than the price that 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.
Clipper Focus Portfolio
The portfolio's main risks are those associated with being a non-
diversified mutual fund that invests principally in equity securities us-
ing a value oriented approach.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or a particu-
lar company.
Value oriented mutual funds may not perform as well as certain other types
of equity mutual funds during periods when value stocks are out of favor.
Diversifying a mutual fund's investment can reduce the risks of investing
by limiting the amount of money it invests in any one issuer or, on a
broader scale, in any one industry. Since the portfolio is not diversi-
fied, it may invest a greater percentage of its assets in a particular is-
suer than a diversified fund. Therefore, being non-diversified may cause
the value of its shares to be more sensitive to changes in the market
value of a single issuer or industry relative to diversified mutual funds.
The portfolio remains fully invested in equity securities at all times. In
bear markets a fully invested mutual fund will generally decline further
than a portfolio with cash and or bond reserves.
2
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
For the fiscal year ended 4/30/99@
<TABLE>
-----------------------
<S> <C>
Management Fees 1.00%
-----------------------
Other Expenses
-----------------------
Total Expenses* 1.00%
-----------------------
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolio. Due to certain expense limits by the adviser and expense off-
sets, investors in the portfolio actually paid the total operating ex-
penses listed in the table below. The adviser may change or cancel its
expense limitation at any time.
For the fiscal year ended 4/30/99
<TABLE>
-----------------------
<S> <C>
Actual Expenses 1.40%
</TABLE>
@ The portfolio began operations on September 10, 1998.
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:
1 Year 3 Years 5 Years 10 Years
--------------------------------
3
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account
To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows.
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Not Available To set up a plan, mail a
Investment Plan completed application to
(Via ACH) 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.
---------------------------------------------------------------------------
Minimum $2,500--regular account $100
Investments $500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
4
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may not exchange shares represented by certif-
icates over the telephone. You may only exchange shares between accounts
with identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your
5
<PAGE>
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) on each
day the NYSE is open. Therefore, to receive the NAV on any given day, the
UAM Funds must accept your order by 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.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy, exchange or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy
or sell shares at the NAV of any given day your financial intermediary
must receive your order by the close of trading on the NYSE that day. Your
financial intermediary is responsible for transmitting all subscription
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 NAV 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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. The UAM Funds value debt securities
that will mature in 60 days or less at amortized cost, which approximates
market value.
6
<PAGE>
In-Kind Transactions
Under certain conditions, the UAM Funds may allow to pay for shares with
securities instead of cash. In addition, the UAM Funds may pay all or part
of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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; they may be liable for any
losses if they fail to do so. The UAM Funds will not be responsible for
any loss, liability, cost or expense for following instructions received
by telephone that it reasonably believes 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.)
7
<PAGE>
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.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
8
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income quarterly.
In addition, it distributes its net capital gains once a year. The UAM
Funds will automatically reinvest dividends and distributions in addi-
tional shares of the portfolio, unless you elect on your account applica-
tion to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in this portfolio. You may also have to pay state and local taxes
on your investment. You should always consult your tax advisor for spe-
cific 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
9
<PAGE>
constitutes a return of your investment. This is known as "buying into a
dividend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolio expects to make a distribution to shareholders.
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
10
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment practices and their associated risks, please read
the "PORTFOLIO SUMMARY" and the statement of additional information (SAI).
You can find information on the portfolio's recent strategies and holdings
in its annual/semi-annual report. As long as it is consistent with its ob-
jective, the portfolio may change these strategies without shareholder ap-
proval.
Investment Process
The adviser focuses on dominant companies that:
. Have leading market positions.
. Generate excess cash flow.
. Have experienced and focused management.
. Are in industries that are often "out-of-favor" in the investment com-
munity.
The adviser invests like a long-term business partner would invest--it
values a company's assets, projects long-term free cash flows and seeks
shareholder-oriented management. The adviser's investment process is very
research intensive and includes meeting with company management, competi-
tors and customers. Some of the major factors the adviser considers when
appraising an investment include balance sheet strength and the ability to
generate earnings and free cash flow. The adviser's analysis gives little
weight to current dividend income.
The adviser prepares valuation models for each company being researched to
identify companies that it believes the market has undervalued. The valua-
tion models attempt to calculate each company's intrinsic value based on
private market transactions and discounted cash flow. The adviser adds
companies to the portfolio when their share price trades below the advis-
er's estimate of intrinsic value and sells companies when their share
prices reach the adviser's estimate of intrinsic value.
The adviser believes that it can produce superior long-term performance by
concentrating on its best investment ideas. Therefore, the portfolio will
be more concentrated than the average equity mutual fund. The portfolio,
which is a "non-diversified" mutual fund, generally contains between
11
<PAGE>
15 to 35 stocks. The portfolio will generally hold its investment in a
particular company for an extended period.
The adviser expects to invest fully the assets of the portfolio. Conse-
quently, the adviser generally expects cash reserves to be less than 5% of
the total assets of the portfolio.
Special Situations
The portfolio may invest in special situations. A special situation arises
when the adviser believes the securities of a particular company will ap-
preciate in value within a reasonable period because of unique circum-
stances applicable to that company. Special situations are events that
could change or temporarily hamper the ongoing operations of a company,
including, but not limited to:
. Liquidations, reorganizations, recapitalizations, mergers or temporary
financial liquidity restraints.
. Material litigation, technological breakthroughs or temporary produc-
tion or product introduction problems
. Natural disaster, sabotage or employee error and new management or
management policies.
Special situations affect companies of all sizes and generally occur re-
gardless of general business conditions or movements of the market as a
whole.
Special situations often involve much greater risk than is inherent in or-
dinary investment securities. In addition, the market price of companies
subject to special situations may never reflect any perceived intrinsic
values.
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in foreign securities and may deviate from its investment
strategies from time to time. It may also employ investment practices that
that this prospectus does not describe, such as repurchase agreements,
when-issued and forward commitment transactions, lending of securities,
borrowing and other techniques. For information concerning these invest-
ment practices and their risks, you should read the SAI.
Foreign Securities
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse politi-
12
<PAGE>
cal and economic developments or changes in the value of foreign currency
can make it harder for a portfolio to sell its securities and could reduce
the value of your shares. Changes in tax and accounting standards and dif-
ficulties obtaining information about foreign companies can negatively af-
fect investment decisions.
In January 1999, certain European nations began to use the new European
common currency, called the Euro. The nations that use the Euro will have
the same monetary policy regardless of their domestic economy, which could
have adverse effects on those economies. In addition, difficulties in con-
verting to the Euro could negatively affect the investments of a portfo-
lio.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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
13
<PAGE>
provider's state of readiness and contingency plan. However, at this time
the degree to which the year 2000 issue will affect the UAM Funds' invest-
ments or operations cannot be predicted. Any negative consequences could
adversely affect your investment in the UAM Funds.
INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
Investment Adviser
Pacific Financial Research, Inc., a Massachusetts corporation located at
9601 Wilshire Boulevard, Suite 800, Beverly Hills, California 90210, is
the investment adviser to the portfolio. The adviser manages and super-
vises the investment of the portfolio's assets on a discretionary basis.
The adviser, an affiliate of United Asset Management Corporation, has pro-
vided investment management services to corporations, foundations, endow-
ments, pension funds and other institutions as well as individuals since
1981.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition, the
adviser has voluntarily agreed to limit the expenses of the portfolio to
1.40% of its average net assets. To maintain this expense limit, the ad-
viser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. The adviser intends to continue its expense
limitation until further notice.
Portfolio Managers
A team of investment professionals is primarily responsible for the day-
to-day management of the portfolio. Listed below are the investment pro-
fessionals that comprise that team and a brief description of their busi-
ness experience.
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
James Gipson Jim founded the adviser in 1980 and is currently President
and a Principal. Jim received his B.A. and M.A. degrees in
Economics with honors from the University of California, Los
Angeles, and his M.B.A. degree with honors from Harvard
Business School. Before entering the investment industry, he
served as an officer in the U.S. Navy and as a consultant
for McKinsey & Co. Before founding, he was a portfolio man-
ager at Source Capital Co. and at Batterymarch Financial. He
authored Winning the Investment Game: A Guide for All Sea-
sons.
-----------------------------------------------------------------------------
Michael Sandler Michael received his B.B.A. with distinction, M.B.A. and
J.D. degrees from the University of Iowa. He spent two years
with International Harvester as a Manager of Asset Redeploy-
ment and one year with Enterprise Systems, Inc. as Vice
President of Business Development. He joined the adviser in
1984 as an analyst and has been a Vice President, Portfolio
Manager and Principal since .
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Bruce Veaco Bruce graduated summa cum laude from the University of Califor-
nia, Los Angeles with a B.A. degree in Economics. He spent five
years as a certified public accountant in the Los Angeles of-
fice of Price Waterhouse where he was an Audit Manager. Bruce
received his M.B.A. degree from Harvard Business School. Bruce
joined the adviser in 1986 as an analyst and has been a Vice
President, Portfolio Manager and Principal since .
-----------------------------------------------------------------------------
Douglas Grey Doug received his B.E. cum laude in Mechanical/Materials Engi-
neering and Economics from Vanderbilt University, and his
M.B.A. from the University of Chicago. He was a General Motors
Scholar and worked for General Motors as a design analysis en-
gineer. Mr. Grey joined the adviser as an analyst in 1986 and
has been a Vice President, Portfolio Manager and Principal
since .
-----------------------------------------------------------------------------
Peter Quinn Peter received his B.S. degree in Finance from Boston College
and his M.B.A. degree from the Peter F. Drucker School of Man-
agement at the Claremont Graduate School. He joined the adviser
as a research associate in 1987 and has been a Vice President,
Portfolio Manager and Principal since .
-----------------------------------------------------------------------------
</TABLE>
Adviser's Historical Performance
The adviser manages separate accounts that have the same investment objec-
tives as the portfolio. The adviser manages these accounts using tech-
niques and strategies substantially similar, though not always identical,
to those used to manage the portfolio. A composite of the performance of
these separate accounts is listed below. The performance data for the man-
aged accounts reflects deductions for all fees and expenses. All fees and
expenses of the separate accounts were less than the operating expenses of
the portfolio. If the performance of the managed accounts was adjusted to
reflect the fees and expenses of the portfolio, the composite's perfor-
mance would have been lower.
The adviser calculated its performance using the standards of the Associa-
tion for Investment Management and Research. Had the adviser calculated
its performance using the SEC's methods, it results might have differed.
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.
15
<PAGE>
<TABLE>
<CAPTION>
Pacific Financial
Research, Inc.* 1S&P 500 Index
- --------------------------------------------------------------------------
<S> <C> <C>
Calendar Years Ended:
1991 12.8% 8.4%
------------------------------------------------------------------------
1992 19.1% 7.6%
------------------------------------------------------------------------
1993 9.8% 10.1%
------------------------------------------------------------------------
1994 -1.7% 1.3%
------------------------------------------------------------------------
1995 48.4% 37.6%
------------------------------------------------------------------------
1997 39.0% 33.4%
------------------------------------------------------------------------
Annualized Return For Various Periods
Ended / / (annualized)
1-year
------------------------------------------------------------------------
3-years
------------------------------------------------------------------------
5-years
Cumulative Since Inception (9/30/91)
</TABLE>
* The adviser's average annual management fee over the period shown
(10/1/91 through / / ) was approximately 0.75%. During the period, fees
on the adviser's individual accounts ranged from 0.52% to 0.90%. Net re-
turns to investors vary depending on the management fee.
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
16
<PAGE>
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
17
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the finan-
cial performance of the portfolio for the fiscal periods indicated. Certain
information contained in the table reflects the financial results for a single
portfolio share. The total returns in the table represent the rate that an in-
vestor would have earned on an investment in the portfolios assuming all divi-
dends and distributions were reinvested. has audited this information.
The financial statements and the unqualified opinion of are included in
the annual report of the portfolio, which is available upon request by calling
the UAM Funds at 1-877-826-5465.
18
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
CLPRX 902556786 781
</TABLE>
<PAGE>
Clipper Focus Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 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 funds' Investment Company Act of 1940 file number is 811-8544.
[UAM LOGO APPEARS HERE]
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
FPA Cresent Portfolio
Institutional Class Prospectus July 30, 1999
================================================================================
UAM
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.
================================================================================
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio? ................................... 1
What are the Principal Investment Strategies of the Portfolio? ............ 1
What are the Principal Risks of the Portfolio? ............................ 1
How has the Portfolio Performed? .......................................... 3
What are the Fees and Expenses of the Portfolio? .......................... 4
Investing with the Uam Funds ................................................. 5
Buying Shares ............................................................. 5
Redeeming Shares .......................................................... 6
Exchanging Shares ......................................................... 6
Transaction Policies ...................................................... 6
Account Policies ............................................................ 10
Small Accounts ............................................................ 10
Distributions ............................................................. 10
Federal Taxes ............................................................. 10
Portfolio Details ........................................................... 12
Principal Investments and Risks of the Portfolio .......................... 12
Other Investment Practices and Strategies ................................. 16
Year 2000 ................................................................. 17
Investment Management ..................................................... 18
Shareholder Servicing Arrangements ........................................ 19
Additional Classes of Shares .............................................. 19
Financial Highlights ........................................................ 20
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks to provide, through a combination of income and capi-
tal appreciation, a total return consistent with reasonable investment
risk. The portfolio cannot guarantee it will meet its investment objec-
tive. The portfolio may not change its investment objective without share-
holder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio actively invests in all parts of a company's capital struc-
ture because the adviser believes that the combination of equity and debt
securities broadens the universe of opportunities of the portfolio, offers
additional diversification and helps to lower volatility. Typically, the
portfolio invests 50% to 70% of its total assets in equity securities and
the balance in debt securities, cash and cash equivalents.
The adviser looks for large and small companies that have excellent future
prospects but are undervalued by the securities markets. The adviser be-
lieves that these opportunities often arise when companies are out-of-fa-
vor or undiscovered by most of Wall Street. Using fundamental security
analysis, the adviser looks for investments that trade at a substantial
discount to private market value (absolute value) rather than those that
might appear inexpensive based on a discount to their peer groups or the
market average (relative value).
The adviser invests in debt securities to provide the portfolio with a re-
liable and recurring stream of income, while preserving its capital. The
adviser selects debt securities by using an approach that is similar to
the approach it uses to select equity securities and by trying to forecast
for current interest rate trends.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal risks associated with investing in
the portfolio. For more information see "PRINCIPAL INVESTMENTS AND RISKS
OF THE PORTFOLIO."
1
<PAGE>
Risks Common to All Mutual Funds
As with all mutual funds, at any time your investment in a portfolio may
be worth more or less than the price that 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.
FPA Crescent Portfolio
The portfolio's main risks are those associated with investing in equity
securities and debt securities using a value oriented approach.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or sector or
a particular company.
Debt securities any lose value 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.
Value oriented mutual funds may not perform as well as certain other types
of equity mutual funds during periods when value stocks are out of favor.
2
<PAGE>
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of this class
of the portfolio has varied from year to year and provide some indication
of the risks of investing in the portfolio. The bar chart shows the in-
vestment returns of the portfolio for each full calendar year. The table
following the bar chart compares the average annual returns of the portfo-
lio to those of a broad-based securities market index. Past performance
does not guarantee future results.
Calendar Year Returns
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Quarter
1 Year Ended
----------------------------------
<S> <C> <C>
Highest Quarter 9.14% 09/30/97
----------------------------------
Lowest Quarter -12.02% 9/30/98
----------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Since
Average annual return for periods ended 12/31/98 1 Year 5 Years Inception*
-----------------------------------------------------------------------------
<S> <C> <C> <C>
FPA Crescent Portfolio 2.79% 15.14% 15.34%
-----------------------------------------------------------------------------
S&P 500 Index 28.60% 24.05% 22.38%
-----------------------------------------------------------------------------
Russell 2500 Index 0.38%
-----------------------------------------------------------------------------
Lehman Brother Government/Corporate Bond Index 9.47% 7.30% 7.51%
-----------------------------------------------------------------------------
Balanced Benchmark+ 4.02%
</TABLE>
* This class of the portfolio began operations 6/2/93. Index comparisons
begin on 5/31/93.
+ Balanced Index is a combined index of which 60% reflects Russell 2500
Index and, 40% the Lehman Brothers Government/Corporate Index.
3
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<S> <C>
For the fiscal year ended 4/30/98
-----------------------------------------
Management Fees 1.00%
-----------------------------------------
Other Expenses
-----------------------------------------
Total 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 throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------
4
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows:
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Investment Plan (Via ACH)
Not Available To set up a plan, mail a
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.
---------------------------------------------------------------------------
Minimum Investments$2,500--regular account $100
$500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
5
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may only exchange shares between accounts with
identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your
6
<PAGE>
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.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial intermedi-
ary (such as a financial planner or adviser). Generally, to buy or sell
shares at the NAV of 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 subscription
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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. The UAM Funds value debt securities
that will mature in 60 days or less at amortized cost, which approximates
market value.
7
<PAGE>
In-Kind Transactions
Under certain conditions, the UAM Funds may allow you to pay for shares
with securities instead of cash. In addition, the UAM Funds may pay all or
part of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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 it reasonably believes 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.)
8
<PAGE>
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.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
9
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income in June and
December. In addition, the portfolio usually distributes its net capital
gains in June, but may also have supplemental distribution in December.
The UAM Funds will automatically reinvest dividends and distributions in
additional shares of the portfolio, unless you elect on your account ap-
plication to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
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 your investment. You should always consult your tax advisor for spe-
cific 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
10
<PAGE>
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 Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
11
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment strategies and their associated risks, please
read the "PORTFOLIO SUMMARY" and the SAI. You can find information on the
portfolio's recent strategies and holdings in its annual/semi-annual re-
port. As long as it is consistent with its objective and other policies
described in the SAI, the portfolio may change these strategies without
shareholder approval.
The portfolio actively invests in all parts of a company's capital struc-
ture because the adviser believes that the combination of equity and debt
securities broadens the universe of opportunities of the portfolio, offers
additional diversification and helps to lower volatility. Typically, the
portfolio invests 50% to 70% of its total assets in equity securities and
the balance in debt securities, cash and cash equivalents. The portfolio
generally invests in investment-grade debt securities, but may also invest
up to 30% of its total assets in debt securities rated below investment-
grade ("high-yield" or "junk" bonds).
Equity Investment Process
The adviser looks for large and small companies that have excellent future
prospects but are undervealued by the securities markets. In the adviser's
view, the stock market prices securities efficiently in the long- term,
rewarding companies that successfully grow their earnings and penalizing
those that do not. Short-term decisions, however, are frequently hasty re-
actions to current economic or company information that could cause a par-
ticular security, industry group or the entire market to become under-
priced or over-priced, which creates an excellent opportunity to either
buy or sell.
These opportunities often arise when companies are out-of-favor or undis-
covered by most of Wall Street. The adviser searches for companies that
offer:
. Earnings growth.
. The opportunity for price/earnings multiple expansion.
. The best combination of such quality criteria as strong market share,
good management, high barriers to entry and high return on capital.
12
<PAGE>
This contrarian investment style often leads the adviser to invest in
"what other people do not wish to own."
The adviser looks for investments that trade at substantial discount to
private market value (absolute value) rather than those that might appear
inexpensive based on a discount to their peer groups or the market average
(relative value). The adviser attempts to determine a company's absolute
value using fundamental security analysis, which it believes provides a
thorough view of its financial and business characteristics. As a part of
its process, the adviser:
. Reviews stock price or industry group under-performance, insider pur-
chases, management changes and corporate spin-offs.
. Communicates directly with company management, suppliers, and custom-
ers.
. Defines the company's future potential, financial strength and compet-
itive position.
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry or sector, such as
increases in production costs, or factors directly related to a specific
company, such as decisions made by its management.
Undervalued companies may have experienced adverse business developments
or other events that have caused their stocks to be out of favor. If the
adviser's assessment of a company is wrong, or if the market does not rec-
ognize the value of the company, the price of its stock may fail to meet
expectations and the portfolio's share price may suffer. A value-oriented
portfolio may not perform as well as certain other types of mutual funds
during periods when value stocks are out of favor.
13
<PAGE>
Debt Investment Process
The adviser invests in debt securities to provide the portfolio with a re-
liable and recurring stream of income, while preserving its capital.
The adviser invests in debt securities using an approach that is similar
to the approach it uses to select equity securities and by trying to fore-
cast current interest rate trends. Usually, the adviser employs a defen-
sive interest rate strategy, which means it tries to keep the average ma-
turity of the portfolio to 10 years or less, by investing at different
points along the yield curve. The adviser also continually considers yield
spreads and their underlying factors such as credit quality, investor per-
ception and liquidity to determine which sectors offer the best investment
value.
The adviser looks for high-yield debt securities that offer substantially
higher yields than government securities and provide the potential for
capital appreciation. The adviser selects high-yield securities by analyz-
ing an assortment of factors, including interest expense coverage, busi-
ness value/debt coverage and current business trends.
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 (dates when debt securities
are due and payable). Debt securities include securities issued by corpo-
rations and the U.S. government and its agencies, mortgage- backed and as-
set-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 bond
will go down, and vice versa). Some types of debt securities are more af-
fected by changes in interest rates than others. For example, changes in
rates may cause people to pay off or refinance the loans underlying mort-
gage-backed and asset-backed securities earlier or later than expected,
which
14
<PAGE>
would shorten or lengthen the maturity of the security. This behavior can
negatively affect the performance of a portfolio by shortening or length-
ening its average maturity and, thus, changing its effective duration. The
unexpected timing of mortgage backed and asset-backed prepayments caused
by changes in interest rates may also cause the 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. To compensate investors for assuming
more risk, issuers with lower credit ratings usually offer their investors
higher "risk premium" in the form of higher interest rates than they would
find with a safer security, such as a U.S. Treasury security. However,
since the interest rate is fixed on a debt security at the time it is pur-
chased, investors reflect changes in confidence regarding the certainty of
interest and principal by adjusting the price they are willing to pay for
the security. This will affect the yield-to-maturity of the security. If
an issuer defaults or becomes unable to honor its financial obligations,
the security may lose some or all of its value.
A security rated within the four highest rating categories by a rating
agency is called investment-grade because its issuer is more likely to pay
interest and repay principal than an issuer of a lower rated bond. Adverse
economic conditions or changing circumstances, however, may weaken the ca-
pacity 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 spec-
ulative 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. Mar-
ket developments and the financial and business condition of the corpora-
tion issuing these securities influences their price and liquidity more
than changes in interest rates, when compared to investment-grade debt se-
curities. Insufficient liquidity in the junk bond market may make it more
difficult to dispose of junk bonds and may cause a portfolio to experience
sudden and substantial price declines. A lack of reliable, objective data
or market quotations may make it more difficult to value junk bonds accu-
rately.
15
<PAGE>
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may:
. Invest in foreign securities and derivatives.
. Sell securities short.
. Deviate from its investment strategy from time to time.
It may also employ investment practices that this prospectus does not de-
scribe, such as repurchase agreements, when-issued and forward commitment
transactions, lending of securities, borrowing and other techniques. For
information concerning these investment practices and their risks, you
should read the SAI.
Foreign Securities
The portfolio may invest up to 20% of its assets in foreign securities.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Changes in tax and accounting standards and diffi-
culties obtaining information about foreign companies can negatively af-
fect investment decisions.
In January 1999, certain European nations began to use the new European
common currency, called the Euro. The nations that use the Euro will have
the same monetary policy regardless of their domestic economy, which could
have adverse effects on those economies. In addition, difficulties in con-
verting to the Euro could negatively affect the investments of a portfo-
lio.
Derivatives
The portfolio may use futures and options (types of derivatives) to remain
fully invested, to reduce transaction costs and to hedge interest rates.
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.
16
<PAGE>
Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the secu-
rity it borrowed by purchasing it at the market price at or before the
time of replacement.
A portfolio can lose money if the price of the security it sold short in-
creases between the date of the short sale and the date on which the port-
folio replaces the borrowed security. Likewise, a portfolio can profit if
the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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.
17
<PAGE>
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
- -------------------------------------------------------------------------------
Investment Adviser
First Pacific Advisors, Inc., a Massachusetts corporation located at 11400
West Olympic Boulevard, Suite 1200, Los Angeles, California 90064, is the
investment adviser to the portfolio. The adviser manages and supervises
the investment of the portfolio's assets on a discretionary basis. The ad-
viser, an affiliate of United Asset Management Corporation, has been in
the investment advisory business since 1954. Currently, the adviser pro-
vides investment management services for seven investment companies, in-
cluding one closed-end investment company, and a variety of institutional
accounts.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition, the
adviser has voluntarily agreed to waive its advisory fees to the extent
necessary to keep the expenses of the portfolio from exceeding 1.45% of
its average net assets. The adviser applies its fee waiver only after giv-
ing effect to expense offsets and after excluding interest, taxes and ex-
traordinary expenses. The adviser intends to continue its expense limita-
tion until further notice.
Portfolio Manager
Mr. Steven Romick is primarily responsible for the day-to-day management
of the portfolio. Mr. Romick has thirteen years of experience in the in-
vestment management business. He is currently a Senior Vice President of
the adviser. From 1990-1996, Mr. Romick was Chairman of Crescent Manage-
ment, an investment advisory firm he founded. Crescent Management served
as the portfolio's adviser until the firm was merged with the current ad-
viser.
18
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives 0.15% of the portion of the daily net asset value of Institutional
Class Shares held by Salomon Smith Barney's eligible customer accounts in
addition to amounts payable to all selling dealers. The UAM Funds also
compensate Salomon Smith Barney for services it provides to certain de-
fined contribution plan shareholders that are not otherwise provided by
the UAM Funds' administrator.
ADDITIONAL CLASSES OF SHARES
- -------------------------------------------------------------------------------
The portfolio also offers an Institutional Service Class shares, which pay
marketing or shareholder servicing fees.
19
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of this class of the portfolio for the fiscal periods
indicated. Certain information contained in the table reflects the finan-
cial results for a single portfolio share. The total returns in the table
represent the rate that an investor would have earned on an investment in
the portfolios assuming all dividends and distributions were reinvested.
has audited this information. The financial statements and the un-
qualified opinion of are included in the annual report of the port-
folio, which is available upon request by calling the UAM Funds at 1-877-
826-5465.
20
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
------------------------------------------------------------------------------------------
<S> <C> <C>
FPACX 902556869 647
</TABLE>
<PAGE>
FPA Crescent Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
Investors can receive free copies of these materials, request other infor-
mation about the 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 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
Funds for the Informed Investor(SM)
FPA Crescent Portfolio
Institutional Service Class Prospectus July 30, 1999
================================================================================
UAM
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.
================================================================================
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio?.................................... 1
What are the Principal Investment Strategies of the Portfolio?............. 1
What are the Principal Risks of the Portfolio?............................. 1
How has the Portfolio Performed?........................................... 3
What are the Fees and Expenses of the Portfolio?........................... 4
Investing with the UAM Funds ................................................. 5
Buying Shares.............................................................. 5
Redeeming Shares........................................................... 6
Exchanging Shares.......................................................... 6
Transaction Policies....................................................... 7
Account Policies ............................................................ 10
Small Accounts............................................................. 10
Distributions.............................................................. 10
Federal Taxes.............................................................. 10
Portfolio Details ........................................................... 12
Principal Investments and Risks of the Portfolio........................... 12
Other Investment Practices and Strategies.................................. 16
Year 2000.................................................................. 17
Investment Management...................................................... 18
Shareholder Servicing Arrangements......................................... 19
Additional Classes of Shares............................................... 20
Financial Highlights ........................................................ 21
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks to provide, through a combination of income and capi-
tal appreciation, a total return consistent with reasonable investment
risk. The portfolio cannot guarantee it will meet its investment objec-
tive. The portfolio may not change its investment objective without share-
holder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio actively invests in all parts of a company's capital struc-
ture because the adviser believes that the combination of equity and debt
securities broadens the universe of opportunities of the portfolio, offers
additional diversification and helps to lower volatility. Typically, the
portfolio invests 50% to 70% of its total assets in equity securities and
the balance in debt securities, cash and cash equivalents.
The adviser looks for large and small companies that have excellent future
prospects but are undervalued by the securities markets. The adviser be-
lieves that these opportunities often arise when companies are out-of-fa-
vor or undiscovered by most of Wall Street. Using fundamental security
analysis, the adviser looks for investments that trade at a substantial
discount to private market value (absolute value) rather than those that
might appear inexpensive based on a discount to their peer groups or the
market average (relative value).
The adviser invests in debt securities to provide the portfolio with a re-
liable and recurring stream of income, while preserving its capital. The
adviser selects debt securities by using an approach that is similar to
the approach it uses to select equity securities and by trying to forecast
for current interest rate trends.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal risks associated with investing in
the portfolio. For more information see "PRINCIPAL INVESTMENTS AND RISKS
OF THE PORTFOLIO."
1
<PAGE>
Risks Common to All Mutual Funds
As with all mutual funds, at any time your investment in a portfolio may
be worth more or less than the price that 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.
FPA Crescent Portfolio
The portfolio's main risks are those associated with investing in equity
securities and debt securities using a value oriented approach.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or sector or
a particular company.
Debt securities may lose value 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.
Value oriented mutual funds may not perform as well as certain other types
of equity mutual funds during periods when value stocks are out of favor.
2
<PAGE>
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of this class
of the portfolio has varied from year to year and provide some indication
of the risks of investing in the portfolio. The bar chart shows the in-
vestment returns of the portfolio for each full calendar year. The table
following the bar chart compares the average annual returns of the portfo-
lio to those of a broad-based securities market index. Past performance
does not guarantee future results.
Calendar Year Returns
CHART APPEARS HERE
<TABLE>
<CAPTION>
Quarter
Return Ended
----------------------------------
<S> <C> <C>
Highest Quarter 9.03% 09/30/97
----------------------------------
Lowest Quarter -12.08% 9/30/98
----------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Average annual return for periods ended Since
12/31/98 1 Year Inception*
-------------------------------------------------------------------
<S> <C> <C>
FPA Crescent Portfolio 2.47% 11.53%
-------------------------------------------------------------------
S&P 500 Index 28.60% 22.38%
-------------------------------------------------------------------
Russell 2500 Index 0.38%
-------------------------------------------------------------------
Lehman Brothers Government/Corporate Bond Index 9.47%
-------------------------------------------------------------------
Balanced Benchmark+ 4.02%
</TABLE>
*This class of the portfolio began operations 1/24/97. Index comparisons
begin on 1/31/97.
+ Balanced Index is a combined index of which 60% reflects Russell 2500
Index and, 40% the Lehman Brothers Government/Corporate Index.
3
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<CAPTION>
For the fiscal year
ended 4/30/98
----------------------------
<S> <C>
Management Fees 1.00%
----------------------------
Service (12b-1) Fees 0.25%
----------------------------
Other Expenses
----------------------------
Total Expenses 1.25%
</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 throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------
4
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows:
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Not Available To set up a plan, mail a
Investment completed application to
Plan (Via ACH) 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.
---------------------------------------------------------------------------
Minimum $2,500--regular account $100
Investments $500--IRAs
$250--spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
5
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By You must first establish the telephone redemption privi-
Telephone 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.
---------------------------------------------------------------------------
By If your account balance is at least $10,000, you may
Systematic transfer as little as $100 per month from your UAM Funds
Withdrawal account to your financial institution.
Plan
(Via ACH) To participate in this service, you must complete the ap-
propriate sections of the account application and mail it
to the UAM Funds.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may only exchange shares between accounts with
identical registrations (i.e., the same names and addresses).
6
<PAGE>
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. 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.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy or sell shares of the UAM Funds through a financial intermedi-
ary (such as a financial planner or adviser). Generally, to buy or sell
shares at the NAV of 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 subscription
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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair
7
<PAGE>
value when events occur that make established valuation methods (such as
stock exchange closing prices) unreliable. The UAM Funds value debt secu-
rities that will mature in 60 days or less at amortized cost, which ap-
proximates market value.
In-Kind Transactions
Under certain conditions, the UAM Funds may allow you to pay for shares
with securities instead of cash. In addition, the UAM Funds may pay all or
part of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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 it reasonably believes 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.
8
<PAGE>
. 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.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
9
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income in June and
December. In addition, the portfolio usually distributes its net capital
gains in June, but may also have supplemental distribution in December.
The UAM Funds will automatically reinvest dividends and distributions in
additional shares of the portfolio, unless you elect on your account ap-
plication to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
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 your investment. You should always consult your tax advisor for spe-
cific 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
10
<PAGE>
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 Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
11
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment strategies and their associated risks, please
read the "PORTFOLIO SUMMARY" and the SAI. You can find information on the
portfolio's recent strategies and holdings in its annual/semi-annual re-
port. As long as it is consistent with its objective and other policies
described in the SAI, the portfolio may change these strategies without
shareholder approval.
The portfolio actively invests in all parts of a company's capital struc-
ture because the adviser believes that the combination of equity and debt
securities broadens the universe of opportunities of the portfolio, offers
additional diversification and helps to lower volatility. Typically, the
portfolio invests 50% to 70% of its total assets in equity securities and
the balance in debt securities, cash and cash equivalents. The portfolio
generally invests in investment-grade debt securities, but may also invest
up to 30% of its total assets in debt securities rated below investment-
grade ("high-yield" or "junk" bonds).
Equity Investment Process
The adviser looks for large and small companies that have excellent future
prospects but are undervalued by the securities markets. In the adviser's
view, the stock market prices securities efficiently in the long-term, re-
warding companies that successfully grow their earnings and penalizing
those that do not. Short-term decisions, however, are frequently hasty re-
actions to current economic or company information that could cause a par-
ticular security, industry group or the entire market to become under-
priced or over-priced, which creates an excellent opportunity to either
buy or sell.
These opportunities often arise when companies are out-of-favor or undis-
covered by most of Wall Street. The adviser searches for companies that
offer:
. Earnings growth.
. The opportunity for price/earnings multiple expansion.
. The best combination of such quality criteria as strong market share,
good management, high barriers to entry and high return on capital.
12
<PAGE>
This contrarian investment style often leads the adviser to invest in
"what other people do not wish to own."
The adviser looks for investments that trade at substantial discount to
private market value (absolute value) rather than those that might appear
inexpensive based on a discount to their peer groups or the market average
(relative value). The adviser attempts to determine a company's absolute
value using fundamental security analysis, which it believes provides a
thorough view of its financial and business characteristics. As a part of
its process, the adviser:
. Reviews stock price or industry group under-performance, insider pur-
chases, management changes and corporate spin-offs.
. Communicates directly with company management, suppliers, and custom-
ers.
. Defines the company's future potential, financial strength and compet-
itive position.
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry or sector, such as
increases in production costs, or factors directly related to a specific
company, such as decisions made by its management.
Undervalued companies may have experienced adverse business developments
or other events that have caused their stocks to be out of favor. If the
adviser's assessment of a company is wrong, or if the market does not rec-
ognize the value of the company, the price of its stock may fail to meet
expectations and the portfolio's share price may suffer. A value-oriented
portfolio may not perform as well as certain other types of mutual funds
during periods when value stocks are out of favor.
13
<PAGE>
Debt Investment Process
The adviser invests in debt securities to provide the portfolio with a re-
liable and recurring stream of income, while preserving its capital.
The adviser invests in debt securities using an approach that is similar
to the approach it uses to select equity securities and by trying to fore-
cast current interest rate trends. Usually, the adviser employs a defen-
sive interest rate strategy, which means it tries to keep the average ma-
turity of the portfolio to 10 years or less, by investing at different
points along the yield curve. The adviser also continually considers yield
spreads and their underlying factors such as credit quality, investor per-
ception and liquidity to determine which sectors offer the best investment
value.
The adviser looks for high-yield debt securities that offer substantially
higher yields than government securities and provide the potential for
capital appreciation. The adviser selects high-yield securities by analyz-
ing an assortment of factors, including interest expense coverage, busi-
ness value/debt coverage and current business trends.
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 (dates when debt securities
are due and payable). Debt securities include securities issued by corpo-
rations and the U.S. government and its agencies, mortgage-backed and as-
set-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 bond
will go down, and vice versa). Some types of debt securities are more af-
fected by changes in interest rates than others. For example, changes in
rates may cause people to pay off or refinance the loans underlying mort-
gage-backed and asset-backed securities earlier or later than expected,
which
14
<PAGE>
would shorten or lengthen the maturity of the security. This behavior can
negatively affect the performance of a portfolio by shortening or length-
ening its average maturity and, thus, changing its effective duration. The
unexpected timing of mortgage backed and asset-backed prepayments caused
by changes in interest rates may also cause the 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. To compensate investors for assuming
more risk, issuers with lower credit ratings usually offer their investors
higher "risk premium" in the form of higher interest rates than they would
find with a safer security, such as a U.S. Treasury security. However,
since the interest rate is fixed on a debt security at the time it is pur-
chased, investors reflect changes in confidence regarding the certainty of
interest and principal by adjusting the price they are willing to pay for
the security. This will affect the yield-to-maturity of the security. If
an issuer defaults or becomes unable to honor its financial obligations,
the security may lose some or all of its value.
A security rated within the four highest rating categories by a rating
agency is called investment-grade because its issuer is more likely to pay
interest and repay principal than an issuer of a lower rated bond. Adverse
economic conditions or changing circumstances, however, may weaken the ca-
pacity 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 spec-
ulative 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. Mar-
ket developments and the financial and business condition of the corpora-
tion issuing these securities influences their price and liquidity more
than changes in interest rates, when compared to investment-grade debt se-
curities. Insufficient liquidity in the junk bond market may make it more
difficult to dispose of junk bonds and may cause a portfolio to experience
sudden and substantial price declines. A lack of reliable, objective data
or market quotations may make it more difficult to value junk bonds accu-
rately.
15
<PAGE>
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may:
. Invest in foreign securities and derivatives.
. Sell securities short.
. Deviate from its investment strategy from time to time.
It may also employ investment practices that this prospectus does not de-
scribe, such as repurchase agreements, when-issued and forward commitment
transactions, lending of securities, borrowing and other techniques. For
information concerning these investment practices and their risks, you
should read the SAI.
Foreign Securities
The portfolio may invest up to 20% of its assets in foreign securities.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Changes in tax and accounting standards and diffi-
culties obtaining information about foreign companies can negatively af-
fect investment decisions.
In January 1999, certain European nations began to use the new European
common currency, called the Euro. The nations that use the Euro will have
the same monetary policy regardless of their domestic economy, which could
have adverse effects on those economies. In addition, difficulties in con-
verting to the Euro could negatively affect the investments of a portfo-
lio.
Derivatives
The portfolio may use futures and options (types of derivatives) to remain
fully invested, to reduce transaction costs or to hedge interest rates.
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.
16
<PAGE>
. Employs a strategy that does not correlate well with the investments
of the portfolio.
Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the secu-
rity it borrowed by purchasing it at the market price at or before the
time of replacement.
A portfolio can lose money if the price of the security it sold short in-
creases between the date of the short sale and the date on which the port-
folio replaces the borrowed security. Likewise, a portfolio can profit if
the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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 orga-
17
<PAGE>
nizations, including 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
- -------------------------------------------------------------------------------
Investment Adviser
First Pacific Advisors, Inc., a Massachusetts corporation located at 11400
West Olympic Boulevard, Suite 1200, Los Angeles, California 90064, is the
investment adviser to the portfolio. The adviser manages and supervises
the investment of the portfolio's assets on a discretionary basis. The ad-
viser, an affiliate of United Asset Management Corporation, has been in
the investment advisory business since 1954. Currently, the adviser pro-
vides investment management services for seven investment companies, in-
cluding one closed-end investment company, and a variety of institutional
accounts.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition, the
adviser has voluntarily agreed to waive its advisory fees to the extent
necessary to keep the expenses of the portfolio from exceeding 1.45% of
its average net assets. The adviser applies its fee waiver only after giv-
ing effect to expense offsets and after excluding interest, taxes and ex-
traordinary expenses. The adviser intends to continue its expense limita-
tion until further notice.
Portfolio Manager
Mr. Steven Romick is primarily responsible for the day-to-day management
of the portfolio. Mr. Romick has thirteen years of experience in the in-
vestment management business. He is currently a Senior Vice President of
the adviser. From 1990-1996, Mr. Romick was Chairman of Crescent Manage-
ment, an investment advisory firm he founded. Crescent Manage-
18
<PAGE>
ment served as the portfolio's adviser until the firm was merged with the
current adviser.
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Distribution Plans
The UAM Funds have adopted a Distribution Plan and a Shareholder Services
Plan under Rule 12b-1 of the Investment Company Act of 1940 that permit
them to pay broker-dealers, financial institutions and other third parties
for marketing, distribution and shareholder services. The UAM Funds' 12b-1
plans allow them to pay up to 1.00% of its average daily net assets annu-
ally for these services. However, they are currently authorized to pay
only 0.25% per year. Because Institutional Service Class Shares pay these
fees out of their assets on an ongoing basis, over time, your shares may
cost more than if you had paid another type of sales charge. Long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by rules of the National Association of
Securities Dealers, Inc.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, rec-
19
<PAGE>
ord-keeping and/or other services performed with respect to the UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives from such entities an amount equal to up to 33.3% of the portion of
the investment advisory fees attributable to the invested assets of Salo-
mon Smith Barney's eligible customer accounts without regard to any ex-
pense limitation in addition to amounts payable to all selling dealers.
The UAM Funds also compensate Salomon Smith Barney for services it pro-
vides to certain defined contribution plan shareholders that are not oth-
erwise provided by the UAM Funds' administrator.
ADDITIONAL CLASSES OF SHARES
- -------------------------------------------------------------------------------
The portfolio also offers an Institutional Class shares, which do not pay
marketing or shareholder servicing fees.
20
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
FPCBX 902556851 648
</TABLE>
<PAGE>
FPA Crescent Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 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
Funds for the Informed Investor(sm)
Hanson Equity Portfolio
Institutional Class Prospectus July 30, 1999
UAM
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary............................................................. 1
What is the Objective of the Portfolio?.................................... 1
What are the Principal Investment Strategies of the Portfolio?............. 1
What are the Principal Risks of the Portfolio?............................. 1
How Has the Portfolio Performed?........................................... 3
What are the Fees and Expenses of the Portfolio?........................... 4
Investing with the UAM Funds.................................................. 5
Buying Shares.............................................................. 5
Redeeming Shares........................................................... 6
Exchanging Shares.......................................................... 6
Transaction Policies....................................................... 6
Account Policies............................................................. 10
Small Accounts............................................................. 10
Distributions.............................................................. 10
Federal Taxes.............................................................. 10
Portfolio Details............................................................ 12
Principal Investments And Risks Of The Portfolio........................... 12
Other Investment Practices and Strategies.................................. 13
Year 2000.................................................................. 14
Investment Management...................................................... 15
Shareholder Servicing Arrangements......................................... 17
Financial Highlights......................................................... 19
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks maximum long-term total return, consistent with rea-
sonable risk to principal, by investing in a diversified portfolio of eq-
uity securities, primarily the common stock of large, United States-based
companies with outstanding financial characteristics and strong growth
prospects that can be purchased at reasonable valuations. The portfolio
cannot guarantee it will meet its investment objective. The portfolio may
not change its investment objective without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO." The portfolio invests primarily in common stocks of large com-
panies. The adviser selects stocks by focusing on individual stocks rather
than industries or sectors (groups of related industries). The adviser at-
tempts to invest in a select number of well-managed, industry-leading com-
panies that have clear business plans, demonstrated consistent earnings,
and prospects for above-average earnings growth. Moreover, the adviser
only invests in a company if it believes the company's stock is selling at
a discount to its intrinsic value.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
1
<PAGE>
Hanson Equity Portfolio
The portfolio's main risks are those associated with investing in equity
securities.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or sector or
a particular company.
2
<PAGE>
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of the port-
folio has varied from year to year and provide some indication of the
risks of investing in the portfolio. The bar chart shows the investment
returns of the portfolio for each full calendar year. The table following
the bar chart compares the average annual returns of the portfolio to
those of a broad-based securities market index. Past performance does not
guarantee future results.
Calendar Year Returns
<TABLE>
<CAPTION>
Quarter
Return Ended
---------------------------------
<S> <C> <C>
Highest Quarter 21.86% 12/31/98
---------------------------------
Lowest Quarter 11.41% 9/30/98
---------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Since
Average annual return for periods ended 12/31/98 1 Year Inception*
---------------------------------------------------------------------
<S> <C> <C>
Hanson Equity Portfolio 18.57% 18.33%
---------------------------------------------------------------------
S%P 500 Index 28.60% 29.88%
</TABLE>
*The portfolio began operations 10/3/97. Index comparisons begin on
9/30/97.
3
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<CAPTION>
For the fiscal
year ended
4/30/99
-----------------------
<S> <C>
Management fees 0.70%
-----------------------
Other expenses
-----------------------
Total expenses 0.70%
</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 throughout the period of your investment.
Although your actual costs may be higher or lower, based on these assump-
tions your costs would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------
4
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows:
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Investment Plan (Via ACH)
Not Available To set up a plan, mail a
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.
---------------------------------------------------------------------------
Minimum Investments$2,500--regular account $100
$500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
5
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM Funds
account to 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may only exchange shares between accounts with
identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. The portfolio calculates its NAV as of the close of trading on the
6
<PAGE>
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 at the close
of trading on 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 UAM Funds 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 subscription
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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. 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, the UAM Funds may allow you to pay for shares
with securities instead of cash. In addition, the UAM Funds may pay all or
part of your redemption proceeds with securities instead of cash.
7
<PAGE>
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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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 it reasonably believes 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 tells the UAM Funds to delay redemptions.
8
<PAGE>
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
9
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income quarterly.
In addition, the portfolio distributes its net capital gains once a year.
The UAM Funds will automatically reinvest dividends and distributions in
additional shares of the portfolio, unless you elect on your account ap-
plication to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
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 your investment. You should always consult your tax advisor for spe-
cific 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
10
<PAGE>
dividend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolio expects to make a distribution to shareholders.
Taxes on Exchanges and Redemptions
When you exchange or redeem shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will 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.
11
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment strategies and their associated risks, please
read the "PORTFOLIO SUMMARY" and the SAI. You can find information on the
portfolio's recent strategies and holdings in its annual/semi-annual re-
port. As long as it is consistent with its objective and other policies
described in the SAI, the portfolio may change these strategies without
shareholder approval.
Normally, the portfolio invests at least 80% of its total assets in equity
securities. These investments will consist primarily of common stocks of
companies with large market capitalizations (typically over $1 billion at
the time of purchase).
Investment Process
The adviser's stock selection process focuses on individual stocks rather
than industries or sectors. This process has three steps. First, the ad-
viser asks three questions:
. Does the adviser understand the company's business?
. Is the company's management shareholder-conscious?
. Is the company's long-term outlook favorable?
Next, the adviser looks for companies that:
. Have discounted valuations a determined by the valuation measurement
most appropriate to the company or its industry (i.e. price-to-earn-
ings, price-to-cash flow or discounted cash flow).
. Have above average total return potential.
. Are leaders in their industries.
. Are highly profitable.
. Are financially strong (low levels of debt).
Finally, all investment decisions must receive the approval of the advis-
er's internal investment committee.
The adviser sells shares of a company when:
. The company fails to meet the adviser's investment criteria.
. The adviser finds a more attractive investment.
. The valuation of the company's shares becomes excessive.
12
<PAGE>
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry or sector, such as
increases in production costs, or factors directly related to a specific
company, such as decisions made by its management.
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in American Depositary Receipts and may deviate from its in-
vestment strategies from time to time. It may also employ investment prac-
tices that that this prospectus does not describe, such as repurchase
agreements, when-issued and forward commitment transactions, lending of
securities, borrowing and other techniques. For information concerning
these investment practices and their risks, you should read the SAI.
American Depositary Receipts (ADRs)
The portfolio may invest up to 20% of its assets in ADRs. ADRs are certif-
icates evidencing ownership of shares of a foreign issuer that are issued
by depository banks and generally trade on an established market in the
United States or elsewhere. Although they are alternatives to directly
purchasing the underlying foreign securities in their national markets and
currencies, ADRs continue to be subject to many of the risks associated
with investing directly in foreign securities.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Changes in tax and accounting standards and diffi-
culties obtaining information about foreign companies can negatively af-
fect investment decisions.
13
<PAGE>
In January 1999, certain European nations began to use the new European
common currency, called the Euro. The nations that use the Euro have the
same monetary policy regardless of their domestic economy, which could
have adverse effects on those economies. In addition, difficulties in con-
verting to the Euro could negatively affect the investments of a portfo-
lio.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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.
14
<PAGE>
INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
Investment Adviser
Hanson Investment Management Company, a California corporation located at
4000 Civic Center Drive, Suite 200, San Rafael, Colorado 94903, is the in-
vestment adviser to the portfolio. The adviser manages and supervises the
investment of the portfolio's assets on a discretionary basis. The advis-
er, an affiliate of United Asset Management Corporation, has provided in-
vestment management services to corporations, unions, pension and profit
sharing plans, trusts, estates and other institutions as well as individu-
als since 1973.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees.
Portfolio Managers
A team of investment professionals is primarily responsible for the day-
to-day management of the portfolios. Listed below are the investment pro-
fessionals that comprise that team and a brief description of their busi-
ness experience.
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
David E. Post Mr. Post is currently Chief Executive Officer and a
Portfolio Manager of the adviser. Mr. Post joined the
adviser in 1994 as a portfolio manager. Mr. Post heads
the adviser's Management Committee. Before joining the
adviser, Mr. Post directed the investment of all managed
assets at CSI Capital Management, the investment firm
which he founded in 1983. Previously, he served as pres-
ident of HS Partners, Inc. Mr. Post began his career in
1979 at Merrill Lynch, Pierce, Fenner & Smith. Mr. Post
received a BA from the University of California, Berk-
ley.
-----------------------------------------------------------------------------
Steven E. Cutcliffe Mr. Cutcliffe is currently a Managing Director and Port-
folio Manager of the adviser. Mr. Cutcliffe joined the
adviser in 1991 as a portfolio manager. Mr. Cutcliffe is
a member of the Management Committee. Previously, Mr.
Cutcliffe was Vice President, Corporate Finanace for Mc-
Ginn, Smith & Company and before that was an Assistant
Secretary of Manufacturers Hanover Trust Company. Mr.
Cutcliffe received an AB from Dartmouth College and an
MBA from Dartnouth's Amos Tuck School.
-----------------------------------------------------------------------------
Steven W. Enos, CFA Mr. Enos is currently a Vice President of Research of
the adviser. Mr. Enos joined the adviser in 1998. Before
joining the adviser, Mr. Enos was a Principal and Vice
President of Wells Capital Management. Previously, Mr.
Enos worked at Dolan Capital Management where he was a
research analyst. Mr. Enos began his investment career
in 1985 with First Interstate Financial Advisors, where
he was a portfolio manager. Mr. Enos is a Chartered Fi-
nancial Analyst and a member of the Security Analysts of
San Francisco. Mr. Enos received a BS from the Univer-
sity of California at Davis.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
John D. Schaeffer Mr. Schaeffer is currently a Vice President of Research
of the adviser. Mr. Schaeffer joined the adviser in 1997.
Before joining the Adviser, Mr. Schaeffer was a research
analyst for Barbary Coast Capital, a hedge fund. Previ-
ously, Mr. Schaeffer was a senior analyst at Bridgewater
Associates, a quantitative investment management firm.
Mr. Schaeffer received a BA from Duke University and an
MBA from the University of California, Berkley.
-----------------------------------------------------------------------------
Jason E. Blattberg Jason E. Blattberg is currently a Research Associate with
the adviser. Mr. Blattberg joined the adviser in 1998.
Before joining the Adviser, Mr. Blattberg was a member of
the investment strategy team at Lehman Brothers. Mr.
Blattberg received a BA from the University of Virginia,
attended the London School of Economics, and received an
MBA from the Anderson Graduate School of Management at
UCLA.
-----------------------------------------------------------------------------
Reynold Samoranos Mr. Samoranos is currently a Vice President of Trading
and Operations for the adviser. Mr. Samoranos joined the
adviser in 1991. In addition to his responsibility as
primary trader, Mr. Samoranos serves the adviser in sev-
eral other areas, including accounting and general staff
management. Before joining the adviser, Mr. Samoranos
worked for Citibank North America as the regional finan-
cial controller. Mr. Samoranos received as BS from the
University of California, Berkley and an MBA from the
University of Chicago.
</TABLE>
Adviser's Historical Performance
The adviser manages separate accounts that have the same investment objec-
tives as the portfolio. The adviser manages these accounts using tech-
niques and strategies substantially similar, though not always identical,
to those used to manage the portfolio. A composite of the performance of
these separate accounts is listed below. The performance data for the man-
aged accounts reflects deductions for all fees and expenses. All fees and
expenses of the separate accounts were less than the operating expenses of
the portfolio. If the performance of the managed accounts was adjusted to
reflect the fees and expenses of the portfolio, the composite's perfor-
mance would have been lower.
The adviser calculated its performance using the standards of the Associa-
tion for Investment Management and Research. Had the adviser calculated
its performance using the SEC's methods, its results might have differed.
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.
16
<PAGE>
<TABLE>
<CAPTION>
Hanson Investment
Management Company
Composite* S&P 500 Index
----------------------------------------------------------------------
<S> <C> <C>
Calendar Years Ended:
1981 11.4% (5.3)%
----------------------------------------------------------------------
1982 26.8% 21.4%
----------------------------------------------------------------------
1983 26.9% 22.6%
----------------------------------------------------------------------
1984 7.7% 6.3%
----------------------------------------------------------------------
1985 33.0% 31.7%
----------------------------------------------------------------------
1986 18.8% 18.7%
----------------------------------------------------------------------
1987 (1.0)% 5.3%
----------------------------------------------------------------------
1988 24.1% 16.6%
----------------------------------------------------------------------
1989 28.5% 31.7%
----------------------------------------------------------------------
1990 0.3% (3.1)%
----------------------------------------------------------------------
1991 33.8% 30.4%
----------------------------------------------------------------------
1992 9.0% 7.7%
----------------------------------------------------------------------
1993 1.6% 10.1%
----------------------------------------------------------------------
1994 (4.5)% 1.2%
----------------------------------------------------------------------
1995 34.0% 37.8%
----------------------------------------------------------------------
1996 22.4% 22.9%
----------------------------------------------------------------------
1997 35.1% 33.4%
----------------------------------------------------------------------
1998
----------------------------------------------------------------------
Annualized Return For Various Periods Ended / / (annualized)
1 Year
----------------------------------------------------------------------
5 Years
----------------------------------------------------------------------
10 Years
----------------------------------------------------------------------
Cumulative Since Inception (1/1/81)
</TABLE>
* The adviser's average annual management fee over the period shown
(1/1/81- / / ) was 0.40%. During the period, fees on the adviser's
individual accounts ranged from 0.31% to 1.00%. Net returns to
investors vary depending on the management fee.
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
17
<PAGE>
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives 0.15% of the portion of the daily net asset value of Institutional
Class Shares held by Salomon Smith Barney's eligible customer accounts in
addition to amounts payable to all selling dealers. The UAM Funds also
compensate Salomon Smith Barney for services it provides to certain de-
fined contribution plan shareholders that are not otherwise provided by
the UAM Funds' administrator.
18
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of the portfolio for the fiscal periods indicated.
Certain information contained in the table reflects the financial results
for a single portfolio share. The total returns in the table represent the
rate that an investor would have earned on an investment in the portfolios
assuming all dividends and distributions were reinvested. has au-
dited this information. The financial statements and the unqualified opin-
ion of are included in the annual report of the portfolio, which is
available upon request by calling the UAM Funds at 1-877-826-5465.
19
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
HANSX 902556844 649
</TABLE>
<PAGE>
Hanson Equity Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 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
Funds for the Informed Investor(SM)
Jacobs International Octagon Portfolio
Institutional Class Prospectus July 31, 1999
UAM(R)
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio? ................................... 1
What are the Principal Investment Strategies of the Portfolio? ............ 1
What are the Principal Risks of the Portfolio? ............................ 1
How has the Portfolio Performed? .......................................... 3
What are the Fees and Expenses of the Portfolio? .......................... 4
Investing with the Uam Funds ................................................. 5
Buying Shares ............................................................. 5
Redeeming Shares .......................................................... 6
Exchanging Shares ......................................................... 6
Transaction Policies ...................................................... 6
Account Policies ............................................................ 10
Small Accounts ............................................................ 10
Distributions ............................................................. 10
Federal Taxes ............................................................. 10
Portfolio Details ........................................................... 12
Principal Investments and Risks of the Portfolio .......................... 12
Other Investment Practices and Strategies ................................. 16
Year 2000 ................................................................. 17
Investment Management ..................................................... 17
Shareholder Servicing Arrangements ........................................ 21
Financial Highlights ........................................................ 22
</TABLE>
<PAGE>
Portfolio Summary
WHAT ARE THE OBJECTIVES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks to provide long-term capital appreciation by investing
in equity securities of companies in developed and emerging markets. The
portfolio cannot guarantee that it will meet its objective. The portfolio
may not change its objective without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio normally invests at least 80% of its total assets in equity
securities of companies located in at least three countries outside the
United States. Typically, the portfolio may invest about 20%-40% of total
assets in small companies.
The adviser expects to diversify the investments of the portfolio through-
out the world and within markets to minimize specific country and currency
risks. Although it may invest in countries with developed or emerging mar-
kets, the portfolio usually invests 10% to 40% of its assets in companies
located in emerging markets.
The adviser looks for companies that it believes will benefit from global
trends, promising business or product developments and changing economic,
social and political trends. The adviser selects investments for the port-
folio using a flexible, value-oriented approach that tries to identify
stocks selling at the greatest discount to their intrinsic future value.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
1
<PAGE>
. 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.
Jacobs International Octagon Portfolio
The portfolio's main risks are those associated with investing in foreign
equity securities using a value oriented approach.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or a particu-
lar company.
Value oriented mutual funds may not perform as well as certain other types
of equity mutual funds during periods when value stocks are out of favor.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Differences in tax and accounting standards and dif-
ficulties in obtaining information about foreign companies can negatively
affect investment decisions.
Investing in stocks of smaller companies can be riskier than investing in
larger, more mature companies. Smaller companies may be more vulnerable to
adverse developments than larger companies because they tend to have more
narrow product lines and more limited financial resources. Their stocks
may trade less frequently and in limited volume.
2
<PAGE>
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of the port-
folio has varied from year to year and provide some indication of the
risks of investing in the portfolio. The bar chart shows the investment
returns of the portfolio for each full calendar year. The table following
the bar chart compares the average annual returns of the portfolio to
those of a broad-based securities market index. Past performance does not
guarantee future results.
Calendar Year Returns
<TABLE>
<CAPTION>
Return Quarter Ended
-----------------------------------------------------------------------
<S> <C> <C>
Highest Quarter 11.64% 3/31/98
-----------------------------------------------------------------------
Lowest Quarter -20.74% 9/30/98
-----------------------------------------------------------------------
Year-To-Date 6/30/99
Average Annual Returns
<CAPTION>
Average annual return for periods ended Since
12/31/98 1 Year Inception*
-----------------------------------------------------------------------
<S> <C> <C>
Jacobs International Octagon Portfolio -5.01% 1.06%
Morgan Stanley Capital International EAFE Index 20.33% 10.82%
</TABLE>
*The portfolio began operations 1/2/97. Index comparisons begin on
12/31/96.
3
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<CAPTION>
For the fiscal
year ended
4/30/99
------------------------
<S> <C>
Management fees 1.00%
------------------------
Other expenses
------------------------
Total expenses* 1.00%
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolio. Due to certain expense limits by the adviser and expense off-
sets, investors in the portfolio actually paid the total operating ex-
penses listed in the table below. The adviser may change or cancel its
expense limitation at any time.
<TABLE>
<CAPTION>
For the fiscal year ended 4/30/99
----------------------------------------------------------------------------
<S> <C>
Actual Expenses 1.75%
</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>
<S> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Ssend your completed Funds as follows.
account application to
the UAM Funds. Wire
your money to the UAM
Funds.
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Investment Plan (Via ACH)
Not Available To set up a plan, mail a
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.
---------------------------------------------------------------------------
Minimum Investments$2,500--regular account $100
$500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
5
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
By Mail Send a letter signed by all registered parties on the ac-
count to UAM Funds specifying:
.The name of the UAM Fund.
.The account number.
. The dollar amount or number of shares you wish to re-
deem.
Certain shareholders may have to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may not exchange shares represented by certif-
icates over the telephone. You may only exchange shares between accounts
with identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. 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)
6
<PAGE>
on each day the NYSE is open. Therefore, to receive the NAV on any given
day, the UAM Funds must accept your order by the close of trading on the
NYSE that day. Otherwise, you will receive the NAV that is calculated on
the close of trading on the following day. The UAM Funds are open for
business on the same days as the NYSE, which is closed on weekends and
certain holidays.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy, exchange or redeem shares of the UAM Funds through a finan-
cial intermediary (such as a financial planner or adviser). Generally, to
buy or sell shares at the NAV on any given day, your financial intermedi-
ary must receive your order by the close of trading on the NYSE that day.
Your financial intermediary is responsible for transmitting all subscrip-
tion 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 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 NAV 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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. The UAM Funds value debt securities
that will mature in 60 days or less at amortized cost, which approximates
market value.
7
<PAGE>
In-Kind Transactions
Under certain conditions, the UAM Funds may allow to pay for shares with
securities instead of cash. In addition, the UAM Funds may pay all or part
of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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; they may be liable for any
losses if they fail to do so. The UAM Funds will not be responsible for
any loss, liability, cost or expense for following instructions received
by telephone that it reasonably believes 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.)
8
<PAGE>
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 tells the UAM Funds to delay redemptions.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
9
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income quarterly.
In addition, it distributes its net capital gains once a year. The UAM
Funds will automatically reinvest dividends and distributions in addi-
tional shares of the portfolio, unless you elect on your account applica-
tion to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in this portfolio. You may also have to pay state and local taxes
on your investment. You should always consult your tax advisor for spe-
cific 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.
10
<PAGE>
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 Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
11
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment practices and their associated risks, please read
the "PORTFOLIO SUMMARY" and the statement of additional information (SAI).
You can find information on the portfolio's recent strategies and holdings
in its annual/semi-annual report. As long as it is consistent with its ob-
jective, the portfolio may change these strategies without shareholder ap-
proval.
The portfolio normally invests at least 80% of its total assets in equity
securities of companies located in at least three countries outside the
United States. These countries that are developed or emerging. Typically,
the portfolio may invest about 20%--40% of its total assets in small com-
panies (typically, companies with market capitalizations of less than $1.5
billion at the time of purchase).
Investment Process
Country Allocation
The adviser focuses on companies rather than on countries or markets. The
adviser expects to diversify the investments of the portfolio throughout
the world and within markets to minimize specific country and currency
risks. The adviser allocates investments to countries based on its percep-
tion of risks in that country and not on any predetermined guidelines. The
following table lists some of the countries in which the portfolio may in-
vest:
<TABLE>
<S> <C> <C>
Argentina Greece Peru
Australia Hong Kong Philippines
Austria Indonesia Poland
Bermuda Ireland Portugal
Brazil Israel Russia
Czech Republic Italy Singapore
Chile Korea Spain
China Japan Sweden
Denmark Malaysia Switzerland
Finland Mexico Thailand
France Netherlands United Kingdom
Germany Norway
</TABLE>
12
<PAGE>
The adviser may invest 10% to 40% of the portfolio's assets in equity se-
curities of companies located in emerging countries. A company is lo cated
in an emerging country if it has one or more of the following characteris-
tics:
. Its principal securities trading market is in an emerging country.
. It derives 50% or more of its annual revenue from goods produced,
sales made or services performed in emerging countries.
. It is organized under the laws of, and has a principal office in, an
emerging country.
It may be too difficult or too risky for the portfolio to invest in some
emerging countries. Consequently, the portfolio will focus its investments
on those countries where it believes the economies are developing and the
markets are becoming more sophisticated.
Security Selection
The adviser looks for companies that it believes will benefit from global
trends, promising business or product developments and changing economic,
social and political trends. The adviser selects investments for the port-
folio using a flexible, value-oriented approach. The adviser tries to
identify stocks selling at the greatest discount to their intrinsic future
value by comparing its estimate of the company's future earnings and cash
flow to the company's industry average and home stock market. Some of the
measurements used in assessing the value of a company include its stock
price-to-cash flow, enterprise value-to-cash flow and price-to-future
earnings ratios.
After concluding that a particular company is good investment, the adviser
sets a purchase price, calculates its potential appreciation and ranks the
investment versus other potential investments.
The portfolio intends to purchase and hold securities for two to three
years and does not expect to trade for short-term gain. The portfolio does
sell a security, however:
. When it reaches its target price. Target prices are determined based
on the advisers valuation models and perception of risk in a particu-
lar country or region
. To make room for a more attractive alternatives.
13
<PAGE>
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
senti- ment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry, such as increases
in production costs, or factors directly related to a specific company,
such as decisions made by its management.
Undervalued companies may have experienced adverse business developments
or other events that have caused their stocks to be out of favor. If the
adviser's assessment of a company is wrong, or if the market does not rec-
ognize the value of the company, the price of its stock may fail to meet
expectations and the portfolio's share price may suffer. A value-oriented
portfolio may not perform as well as certain other types of mutual funds
during periods when value stocks are out of favor.
Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. en-
tities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
. Local political, economic, regulatory or social instability, military
action or unrest, or adverse diplomatic developments may affect the
value of foreign investments. A foreign government may act adversely
to the interests of U.S. investors. Such actions may include expropri-
ation or nationalization of assets, confiscatory taxation and other
restrictions on U.S. investment.
. The securities of foreign companies are often denominated in foreign
currencies. Since the portfolio's net asset value is denominated in
U.S. dollars, changes in foreign currency rates and in exchange con-
trol regulations may positively or negatively affect the value of its
securities. In January 1999, certain European nations began to use the
new European common currency, called the Euro. The nations that use
the Euro will have the same monetary policy regardless of their domes-
tic economy, which could have adverse effects on those
14
<PAGE>
economies. In addition, difficulties in converting to the Euro could
negatively affect the investments of a portfolio.
. Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those are in the U.S. Securities of some
foreign issuers may be less liquid and more volatile than secu rities
of comparable U.S. issuers. In addition, the costs associated with
foreign investments, including withholding taxes, brokerage commis-
sions and custodial costs, are generally higher than the costs associ-
ated with U.S. investments.
. Foreign countries have different legal systems and different regula-
tions concerning financial disclosure, accounting and auditing stan-
dards than the U.S. This could make corporate financial information
more difficult to obtain or understand and less reliable than informa-
tion about U.S. companies.
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile
than those in more developed markets, reflecting the greater uncertainties
of investing in less established markets and economies. In particular:
. Countries with emerging markets may have relatively unstable govern-
ments, may present the risks of nationalization of businesses, re-
strictions on foreign ownership and prohibitions on the repatriation
of assets.
. They may protect property rights less than more developed countries.
. The economies of countries with emerging markets may be based on only
a few industries, may be highly vulnerable to changes in local or
global trade conditions and may suffer from extreme and volatile debt
burdens or inflation rates.
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or impos-
sible at times.
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer that are issued by depository banks and gen-
erally trade on an established market in the United States or elsewhere.
Although they are alternatives to directly purchasing the underlying for-
eign securities in their national markets and currencies, ADRs continue to
be subject to many of the risks associated with investing directly in for-
eign securities.
15
<PAGE>
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
As described below, the portfolio may use derivatives and may deviate from
its investment strategy from time to time. In addition, the portfolios may
employ investment practices that are not described in this prospec tus,
such as repurchase agreements, when-issued and forward commit ment trans-
actions, lending of securities, borrowing and other techniques. For more
information concerning the risks associated with these investment practic-
es, you should read the SAI.
Derivatives
The portfolio may use forward foreign currency exchange contracts (a form
of derivative) to minimize currency fluctuations and assist in settling
trades. 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.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
16
<PAGE>
YEAR 2000
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
Investment Adviser
Jacobs Asset Management, a Delaware limited partnership located at 8400
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301, is
the investment adviser to the portfolio. The adviser manages and super-
vises the investment of the portfolio's assets on a discretionary basis.
The adviser, an affiliate of United Asset Management Corporation, provides
investment management services to corporations, unions, pension and profit
sharing plans, trusts, estates and other institutions as well as individu-
als. Although the adviser is a relatively new entity, it principals, who
are also the portfolio managers of the portfolio, have substantial experi-
ence in managing mutual funds.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser % of its average net assets in management fees. In addition, the
adviser has voluntarily agreed to limit the expenses of the portfolio to
1.75% of its average net assets. To maintain this expense limit, the ad-
viser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. The adviser intends to continue its expense
limitation until further notice.
17
<PAGE>
Portfolio Managers
A team of investment professionals is primarily responsible for the day-
to-day management of the portfolio. Listed below are the investment pro-
fessionals that comprise that team and a brief description of their busi-
ness experience.
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Daniel L. Jacobs, CFA Mr. Jacobs has been President and Chief Investment Of-
ficer of the adviser since July 1995. From 1984-1995,
Mr. Jacobs managed $ 3.4 billion in international and
global equity portfolios as Executive Vice President
and Director of Templeton Investment Counsel. Mr. Ja-
cobs was Portfolio Manager of Templeton's $ 1.4 bil-
lion Smaller Companies Growth Fund and was a Senior
Portfolio Manager of institutional separate accounts.
Mr. Jacobs served as President of the Templeton Vari-
able Annuity Fund and Portfolio Manager for the Equity
and the equity portion of the Balanced Funds in the
Templeton Variable Annuity Series. From 1976-1984, he
was Vice President/Portfolio Manager, Institutional
Investment Group and International Division of the
First National Bank of Atlanta. Mr. Jacobs received an
MBA in Finance from Emory University (1976) and a BA
in Economics from Miami University (1974). In addition
to holding a CFA and CIC, Mr. Jacobs is a founding
member of the International Society of Financial Ana-
lysts.
-----------------------------------------------------------------------------
Wai W. Chin Ms. Chin joined the adviser in July 1995 as Managing
Director of Asian Research and Portfolio Management.
Ms. Chin was formerly Vice President of the Global Eq-
uity Group of Scudder, Stevens & Clark, where she
spent over five years as a Pacific Basin analyst, spe-
cializing in the developed and emerging markets of
Asia. She started her research analyst career at Baron
Capital, Inc. and was a foreign currency trader at the
Bank of America and Creditanstalt Banverein. Ms. Cgin
holds a BA in East Asian Studies from Barnard College
and received an MBA in Finance from Columbia Universi-
ty.
-----------------------------------------------------------------------------
Robert J. Jurgens Mr. Jurgens joined the adviser in July 1995 as Manag-
ing Director of European Research and Portfolio Man-
agement. As Vice President and head of AIG Global In-
vestors' International Equity Division from 1993-1995,
Mr. Jurgens was responsible for investment policy and
management of international and global equity portfo-
lios. He has fourteen years of experience investing in
the global stock markets, with particular expertise in
the European markets. Upon graduation from Pennsylva-
nia State University with a BS in Business/French, Mr.
Jurgens spent four years with Scandinavian Bank Group
as a Global Portfolio Manager/Analyst, three years
with Nomura Bank International in London managing
global equities, and two years as an International Eq-
uity Manager at the privately held Antessa Investment
Management Limited.
</TABLE>
18
<PAGE>
Adviser's Historical Performance
The adviser manages separate accounts that have the same investment objec-
tives as the portfolio. The adviser manages these accounts using tech-
niques and strategies substantially similar, though not always identical,
to those used to manage the portfolio. A composite of the performance of
these separate accounts is listed below. The performance data for the man-
aged accounts reflects deductions for all fees and expenses. All fees and
expenses of the separate accounts were less than the operating expenses of
the portfolio. If the performance of the managed accounts was adjusted to
reflect the fees and expenses of the portfolio, the composite's perfor-
mance would have been lower.
The adviser calculated its performance using the standards of the Associa-
tion for Investment Management and Research. Had the adviser calculated
its performance using the SEC's methods, it results might have differed.
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>
Jacobs Asset
Management Morgan Stanley
International Capital International
Composite* EAFE Index
-----------------------------------------------------------
<S> <C> <C>
Calendar Years Ended:
-----------------------------------------------------------
1995
-----------------------------------------------------------
1996
-----------------------------------------------------------
1997
-----------------------------------------------------------
1998
-----------------------------------------------------------
</TABLE>
Annualized Return For Various Periods Ended / / (annualized)
<TABLE>
<S> <C> <C>
1-year
-----------------
3-years
-----------------
5-years
-----------------
</TABLE>
Cumulative Since Inception (10/1/95)
* The adviser's average annual management fee over the period shown
(10/1/95 through / / ) was approximately 0.75%.
19
<PAGE>
Historical Performance of Another Mutual Fund Managed By Mr. Jacobs
Set forth below is performance data the adviser has provided regarding the
Templeton International Fund, is a series of the Templeton Variable Prod-
uct Series Fund. That other mutual fund is a registered, open-end invest-
ment company with substantially similar, though not always identical, in-
vestment objectives, policies and strategies as the portfolio. Daniel Ja-
cobs was the lead portfolio manager for that other fund from its inception
(May 1, 1992) to June 30, 1995. During that time, Mr. Jacobs had primary
responsibility for the day-to-day management of the fund and no other per-
son played a significant role in achieving the performance of the fund.
The portfolio and the other mutual fund are separate funds and members of
different fund families. Their investment returns may differ because they
have different fees and expenses. The performance of the other mutual fund
is not intended to predict or suggest the performance that an investor
might achieve by investing in the portfolio.
<TABLE>
<CAPTION>
Three Years
Year Ended Ended
June 30, June 30,
1995 1995
---------------------------------------------------------------------------
<S> <C> <C>
Templeton International Fund 11.43% 14.55%
---------------------------------------------------------------------------
Lipper International Index 0.95% 7.22%
---------------------------------------------------------------------------
Morgan Stanley Capital International EAFE Index US 1.66% 12.68%
---------------------------------------------------------------------------
</TABLE>
20
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives 0.15% of the portion of the daily net asset value of Institutional
Class Shares held by Salomon Smith Barney's eligible customer accounts in
addition to amounts payable to all selling dealers. The UAM Funds also
compensate Salomon Smith Barney for services it provides to certain de-
fined contribution plan shareholders that are not otherwise provided by
the UAM Funds' administrator.
21
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of the portfolio for the fiscal periods indicated.
Certain information contained in the table reflects the financial results
for a single portfolio share. The total returns in the table represent the
rate that an investor would have earned on an investment in the portfolios
assuming all dividends and distributions were reinvested. has au-
dited this information. The financial statements and the unqualified opin-
ion of are included in the annual report of the portfolio, which
is available upon request by calling the UAM Funds at 1-877-826-5465.
22
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
JIOPX 902556828 900
</TABLE>
<PAGE>
Jacobs International Octagon Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual/Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 the reports of the portfolios 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 funds' Investment Company Act of 1940 file number is 811-8544.
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
MJI International Equity Portfolio
Institutional Class Prospectus July 31, 1999
UAM(R)
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 3
What is the Objective of the Portfolio? ................................... 3
What are the Principal Investment Strategies of the Portfolio? ............ 3
What are the Principal Risks of the Portfolio ............................. 3
How has the Portfolio Performed? .......................................... 5
What are the Fees and Expenses Portfolio's? ............................... 6
Investing with the Uam Funds ................................................. 7
Buying Shares ............................................................. 7
Redeeming Shares .......................................................... 8
Exchanging Shares ......................................................... 8
Transaction Policies ...................................................... 8
Account Policies ............................................................ 12
Small Accounts ............................................................ 12
Distributions ............................................................. 12
Federal Taxes ............................................................. 12
Fund Details ................................................................ 14
Principal Investments and Risks of the Portfolio .......................... 14
Other Investment Practices and Strategies ................................. 17
Year 2000 ................................................................. 17
Investment Management ..................................................... 18
Shareholder Servicing Arrangements ........................................ 19
Additional Classes of Shares............................................... 20
Financial Highlights ........................................................ 21
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks to maximize total return, including both capital ap-
preciation and current income, by investing primarily in the common stocks
of companies based outside of the United States. The portfolio cannot
guarantee it will meet its investment objective. The portfolio may not
change its investment objective without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio normally invests at least 65% of its total assets in common
stocks (including rights or warrants to purchase common stocks) of compa-
nies located in at least three countries outside the United States. While
the portfolio invests primarily in securities of companies domiciled in
developed countries, it may also invest in developing countries.
The investment process of the adviser begins by determining which interna-
tional stock markets the portfolio should invest in and in what propor-
tion. The adviser makes its decision by evaluating the various markets
through a proprietary system that analyzes economic factors, stock prices
in each market, market performance and trends in monetary policy. The ad-
viser then compares the companies in each of those markets in an effort to
select stocks that it believes the market has undervalued compared to in-
dustry norms within their countries.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
3
<PAGE>
. 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.
MJI International Equity Portfolio
The portfolio's main risks are those associated with investing in foreign
equity securities.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or a particu-
lar company.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Differences in tax and accounting standards and dif-
ficulties in obtaining information about foreign companies can negatively
affect investment decisions.
4
<PAGE>
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of this class
of the portfolio has varied from year to year and provide some indication
of the risks of investing in the portfolio. The bar chart shows the in-
vestment returns of the portfolio for each full calendar year. The table
following the bar chart compares the average annual returns of the portfo-
lio to those of a broad-based securities market index. Past performance
does not guarantee future results.
Calendar Year Returns
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
Return Quarter Ended
---------------------------------------
<S> <C> <C>
Highest Quarter 18.52% 12/31/98
---------------------------------------
Lowest Quarter -13.87% 9/30/98
---------------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Since
Average annual return for periods ended 12/31/98 1 Year Inception*
---------------------------------------------------------------------
<S> <C> <C>
MJI International Equity Portfolio 15.53% 6.46%
---------------------------------------------------------------------
Morgan Stanley Capital International EAFE Index 20.33% 9.02%
</TABLE>
*This class began operations on 9/16/94. Index comparisons begin on
9/30/94.
5
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Fund Operating Expenses (Expenses That Are Deducted From the Assets of
a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
------------------------------------------------------------------
<S> <C>
Management fees 0.75%
------------------------------------------------------------------
Other expenses
------------------------------------------------------------------
Total expenses* 1.75%
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolio. Due to certain expense limits by the adviser and expense off-
sets, investors in the portfolio actually paid the total operating ex-
penses listed in the table below. The adviser may change or cancel its
expense limitation at any time.
For the fiscal year ended 4/30/99
<TABLE>
------------------------------------------------------------------
<S> <C>
Actual Expenses 1.50%
</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 5 Years 10 Years
----------------------------------
<S> <C> <C> <C>
</TABLE>
6
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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 portfolio into
which you want to invest.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows.
count application to
the UAM Funds. Wire
your money to the UAM
Funds on follows:
Wiring Instructions
United Missouri Bank
ABA # 101000695
UAM Funds
DDA Acct. # 9870964163
Ref: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Not Available To set up a plan, mail a
Investment Plan completed application to
(Via ACH) 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.
---------------------------------------------------------------------------
Minimum $2,500--regular account $100
Investments $500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
7
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
By Mail Send a letter signed by all registered parties on the ac-
count to UAM Funds specifying:
. The name of the UAM Fund.
. The account number.
. The dollar amount or number of shares you wish to redeem
the portfolio, the account number and 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.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may not exchange shares represented by certif-
icates over the telephone. You may only exchange shares between accounts
with identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your
8
<PAGE>
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) on each
day the NYSE is open. Therefore, to receive the NAV on any given day, the
UAM Funds must accept your order by 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.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy, exchange or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy
or sell shares at the NAV of any given day your financial intermediary
must receive your order by the close of trading on the NYSE that day. Your
financial intermediary is responsible for transmitting all subscription
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 NAV 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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. The UAM Funds value debt securities
that will mature in 60 days or less at amortized cost, which approximates
market value.
9
<PAGE>
In-Kind Transactions
Under certain conditions, the UAM Funds may allow to pay for shares with
securities instead of cash. In addition, the UAM Funds may pay all or part
of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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; they may be liable for any
losses if they fail to do so. The UAM Funds will not be responsible for
any loss, liability, cost or expense for following instructions received
by telephone that it reasonably believes 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.)
10
<PAGE>
Redemptions
The UAM Funds may suspend your right to redeem if:
. An emergency exists and a portfolio cannot dispose of its investments
or fairly determine their value.
. Trading on the NYSE is restricted.
. The SEC tells the UAM Funds to delay redemptions.
At any time, the UAM Funds may change or eliminate any of the redemption
methods described above, except redemption by mail.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
11
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income and net cap-
ital gains once a year. The UAM Funds will automatically reinvest divi-
dends and distributions in additional shares of the portfolio, unless you
elect on your account application to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in this portfolio. You may also have to pay state and local taxes
on your investment. You should always consult your tax advisor for spe-
cific 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
12
<PAGE>
dividend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolio expects to make a distribution to shareholders.
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
13
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment practices and their associated risks, please read
the "PORTFOLIO SUMMARY" and the statement of additional information (SAI).
You can find information on the portfolio's recent strategies and holdings
in its annual/semi-annual report. As long as it is consistent with its ob-
jective, the portfolio may change these strategies without shareholder ap-
proval.
The portfolio normally invests at least 65% of its total assets in common
stocks (including rights or warrants to purchase common stocks) of compa-
nies located in at least three countries outside the United States. Gener-
ally, the portfolio invests in common stocks of companies listed on stock
exchanges of the United States or foreign countries, but it may also in-
vest in stocks traded in the over-the-counter market. While the portfolio
invests primarily in securities of companies domiciled in developed coun-
tries, it may also invest in developing countries.
Investment Process
The adviser tries to minimize specific country and currency risks by di-
versifying the investments of the portfolio throughout the world and
within markets. The investment process of the adviser begins by determin-
ing which international stock markets the portfolio should invest in and
in what proportion. The adviser makes its decision by evaluating the vari-
ous markets through a proprietary system that analyzes economic factors,
stock prices in each market, market performance and trends in monetary
policy.
Once the adviser decides how to allocate the assets of the portfolio, it
then compares the companies in each of those markets according to:
.Quality of management.
.Market position.
.Financial strength.
.Ability to earn competitive returns on equity and assets.
.Growth potential.
Finally, the adviser selects stocks that it believes the market has under-
valued compared to industry norms within their countries.
14
<PAGE>
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry, such as increases
in production costs, or factors directly related to a specific company,
such as decisions made by its management.
Undervalued companies may have experienced adverse business developments
or other events that have caused their stocks to be out of favor. If the
adviser's assessment of a company is wrong, or if the market does not rec-
ognize the value of the company, the price of its stock may fail to meet
expectations and the portfolio's share price may suffer. A value-oriented
portfolio may not perform as well as certain other types of mutual funds
during periods when value stocks are out of favor.
Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. en-
tities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
. Local political, economic, regulatory or social instability, military
action or unrest, or adverse diplomatic developments may affect the
value of foreign investments. A foreign government may act adversely
to the interests of U.S. investors. Such actions may include expropri-
ation or nationalization of assets, confiscatory taxation and other
restrictions on U.S. investment.
. The securities of foreign companies are often denominated in foreign
currencies. Since the portfolio's net asset value is denominated in
U.S. dollars, changes in foreign currency rates and in exchange con-
trol regulations may positively or negatively affect the value of its
securities. In January 1999, certain European nations began to use the
new European common currency, called the Euro. The nations that use
the Euro will have the same monetary policy regardless of their domes-
tic economy, which could have adverse effects on those
15
<PAGE>
economies. In addition, difficulties in converting to the Euro could
negatively affect the investments of a portfolio.
. Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those are in the U.S. Securities of some
foreign issuers may be less liquid and more volatile than securities
of comparable U.S. issuers. In addition, the costs associated with
foreign investments, including withholding taxes, brokerage commis-
sions and custodial costs, are generally higher than the costs associ-
ated with U.S. investments.
. Foreign countries have different legal systems and different regula-
tions concerning financial disclosure, accounting and auditing stan-
dards than the U.S. This could make corporate financial information
more difficult to obtain or understand and less reliable than informa-
tion about U.S. companies.
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile
than those in more developed markets, reflecting the greater uncertainties
of investing in less established markets and economies. In particular:
. Countries with emerging markets may have relatively unstable govern-
ments, may present the risks of nationalization of businesses, re-
strictions on foreign ownership and prohibitions on the repatriation
of assets.
. They may protect property rights less than more developed countries.
. The economies of countries with emerging markets may be based on only
a few industries, may be highly vulnerable to changes in local or
global trade conditions and may suffer from extreme and volatile debt
burdens or inflation rates.
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or impos-
sible at times.
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer that are issued by depository banks and gen-
erally trade on an established market in the United States or elsewhere.
Although they are alternatives to directly purchasing the underlying for-
eign securities in their national markets and currencies, ADRs continue to
be subject to many of the risks associated with investing directly in for-
eign securities.
16
<PAGE>
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in derivatives and may deviate from its investment strategies
from time to time. It may also employ investment practices that this pro-
spectus does not describe, such as repurchase agreements, when-issued and
forward commitment transactions, lending of securities, borrowing and
other techniques. For information concerning these investment practices
and their risks, you should read the SAI.
Derivatives
The portfolio may use various derivatives, including futures, forward for-
eign currency exchange contracts, options and swaps to hedge its invest-
ments. 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.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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
17
<PAGE>
functions and could disrupt the operations of the UAM Funds or financial
markets in general. The year 2000 issue affects all companies and organi-
zations, including 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
- -------------------------------------------------------------------------------
Investment Adviser
Murray Johnstone International, Ltd., located in Glasgow, Scotland, is the
investment adviser to the portfolio. The adviser manages and supervises
the investment of the portfolio's assets on a discretionary basis. The ad-
viser, an affiliate of United Asset Management Corporation, is an interna-
tional investment adviser whose origins date back to 1907.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition,
the adviser has voluntarily agreed to limit the expenses of the portfolio
to 1.50% of its average net assets. To maintain this expense limit, the
adviser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. The adviser intends to continue its expense
limitation until further notice.
Portfolio Manager
Since the country decision is of first importance, the Country Allocation
Team is the key decision maker for the portfolio, and their experience and
judgement are critical. The team is James Clunie (Head of Allocation) and
Andrew Preston.
James Clunie is the Senior Investment Officer in charge of North American
clients and a Director of Murray Johnstone International. James is also
responsible for research into the performance and continued development of
the Twenty Questions analysis. James came to Murray Johnstone in 1989 af-
ter receiving his BS with Honors in Mathematics and
18
<PAGE>
Statistics from Edinburgh University. He has worked in the UK department
and spent time in the US, as a product specialist. He is a Certified Fi-
nancial Analyst.
Andrew Preston is a Senior Investment Officer and a Director of Murray
Johnstone International. Among his responsibilities is oversight of ac-
counts with special guidelines. He has been with Murray Johnstone for
fourteen years, and has been a member of the UK and Japan teams. He also
played a prominent role in the establishment of a joint venture company
formed in 1986 to invest Japanese Institutional funds internationally.
Earlier in his career, Andrew was a diplomat in the Australian Department
of Foreign Affairs, and he is fluent in Japanese and Chinese.
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representative.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with
19
<PAGE>
Salomon Smith Barney under which Salomon Smith Barney provides certain de-
fined contribution plan marketing and shareholder services and receives
0.15% of the portion of the daily net asset value of Institutional Class
Shares held by Salomon Smith Barney's eligible customer accounts in addi-
tion to amounts payable to all selling dealers. The UAM Funds also compen-
sate Salomon Smith Barney for services it provides to certain defined con-
tribution plan shareholders that are not otherwise provided by the UAM
Funds' administrator.
ADDITIONAL CLASSES OF SHARES
- -------------------------------------------------------------------------------
The portfolio also offers an Institutional Service Class shares, which pay
marketing or shareholder servicing fees.
20
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of this class of the portfolio for the fiscal periods
indicated. Certain information contained in the table reflects the finan-
cial results for a single portfolio share. The total returns in the table
represent the rate that an investor would have earned on an investment in
the portfolios assuming all dividends and distributions were reinvested.
has audited this information. The financial statements
and the unqualified opinion of are included in the an-
nual report of the portfolio, which is available upon request by calling
the UAM Funds at 1-877-826-5465.
21
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
MJIEX 902556703 910
</TABLE>
<PAGE>
MJI International Equity Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 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 funds' Investment Company Act of 1940 file number is 811-8544.
[UAM LOGO]
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
MJI International Equity Portfolio
Institutional Service Class Prospectus July 31, 1999
UAM
The Securities and Exchange Commission (SEC)has not approved or
disapproved these securities or passed upon the adequary or accurace of
this prospectus. Any representation to the contrary is a criminal offense.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 3
What is the Objective of the Portfolio?.................................... 3
What are the Principal Investment Strategies of the Portfolio?............. 3
What are the Principal Risks of the Portfolio?............................. 3
How Has the Portfolio Performed?........................................... 5
What are the Fees and Expenses of the Portfolio?........................... 6
Investing with the UAM Funds ................................................. 7
Buying Shares ............................................................. 7
Redeeming Shares .......................................................... 8
Exchanging Shares ......................................................... 8
Transaction Policies ...................................................... 8
Account Policies ............................................................ 12
Small Accounts............................................................. 12
Distributions.............................................................. 12
Federal Taxes.............................................................. 12
Portfolio Details ........................................................... 14
Principal Investments And Risks Of The Portfolio........................... 14
Other Investment Practices and Strategies.................................. 16
Year 2000.................................................................. 17
Investment Management...................................................... 17
Shareholder Servicing Arrangements......................................... 18
Additional Classes of Shares............................................... 19
</TABLE>
<TABLE>
<S> <C>
Financial High-
lights ....... 20
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks to maximize total return, including both capital
appreciation and current income, by investing primarily in the common
stocks of companies based outside of the United States. The portfolio can-
not guarantee it will meet its investment objective. The portfolio may not
change its investment objective without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio normally invests at least 65% of its total assets in common
stocks (including rights or warrants to purchase common stocks) of compa-
nies located in at least three countries outside the United States. While
the portfolio invests primarily in securities of companies domiciled in
developed countries, it may also invest in developing countries.
The investment process of the adviser begins by determining which interna-
tional stock markets the portfolio should invest in and in what propor-
tion. The adviser makes its decision by evaluating the various markets
through a proprietary system that analyzes economic factors, stock prices
in each market, market performance and trends in monetary policy. The ad-
viser then compares the companies in each of those markets in an effort to
select stocks that it believes the market has undervalued compared to in-
dustry norms within their countries.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
3
<PAGE>
. 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.
MJI International Equity Portfolio
The portfolio's main risks are those associated with investing in foreign
equity securities.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or a particu-
lar company.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Differences in tax and accounting standards and dif-
ficulties in obtaining information about foreign companies can negatively
affect investment decisions.
4
<PAGE>
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of this class
of the portfolio has varied from year to year and provide some indication
of the risks of investing in the portfolio. The bar chart shows the in-
vestment returns of the portfolio for each full calendar year. The table
following the bar chart compares the average annual returns of the portfo-
lio to those of a broad-based securities market index. Past performance
does not guarantee future results.
Calendar Year Returns
[84816FALAN BAR GRAPH]
<TABLE>
<CAPTION>
Return Quarter Ended
--------------------------------------
<S> <C> <C>
Highest Quarter 18.46% 12/31/98
--------------------------------------
Lowest Quarter 13.88% 9/30/98
--------------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Average annual return for periods ended
12/31/98 1 Year Since Inception*
-------------------------------------------------------------------------
<S> <C> <C>
MJI International Equity Portfolio 15.25% 10.42%
-------------------------------------------------------------------------
Morgan Stanley Capital International EAFE Index 20.33% 30.95%
</TABLE>
*This class began operations on 12/31/96. Index comparisons begin on
1/1/97.
5
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<S> <C>
For the fiscal year ended 4/30/99
----------------------------------------
Management fees 0.75%
----------------------------------------
Service (12b-1) Fees 0.25%
----------------------------------------
Other expenses
----------------------------------------
Total expenses* 1.00%
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolio. Due to certain expense limits by the adviser and expense off-
sets, investors in the portfolio actually paid the total operating ex-
penses listed in the table below. The adviser may change or cancel its
expense limitation at any time.
<TABLE>
<S> <C>
For the fiscal year ended 4/30/99
--------------------------------------
Actual Expenses
</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 5 Years 10 Years
----------------------------------
<S> <C> <C> <C>
$ $ $ $
</TABLE>
6
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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 portfolio into
which you want to invest.
---------------------------------------------------------------------------
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 wire your money to the UAM
Send your completed ac- Funds as follows.
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Not Available To set up a plan, mail a
Automatic completed application to
Investment the UAM Funds. To cancel
Plan (Via or change a plan, write to
ACH) the UAM Funds. Allow up to
15 days to create the plan
and 3 days to cancel or
change it.
---------------------------------------------------------------------------
Minimum $2,500--regular account $100
Investments $500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
7
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
By Mail Send a letter signed by all registered parties on the ac-
count to UAM Funds specifying:
. The name of the UAM Fund.
. The account number.
. The dollar amount or number of shares you wish to re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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-UAM-Link to redeem your shares. Based on your
instructions, the UAM Funds will mail your proceeds to you
or wire them to your bank.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may not exchange shares represented by certif-
icates over the telephone. You may only exchange shares between accounts
with identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. 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)
8
<PAGE>
on each day the NYSE is open. Therefore, to receive the NAV on any given
day, the UAM Funds must accept your order by 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 business on the same days as the NYSE, which is closed on weekends and
certain holidays.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy, exchange or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy
or sell shares at the NAV of any given day your financial intermediary
must receive your order by the close of trading on the NYSE that day. Your
financial intermediary is responsible for transmitting all subscription
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 NAV 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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. The UAM Funds value debt securities
that will mature in 60 days or less at amortized cost, which approximates
market value.
9
<PAGE>
In-Kind Transactions
Under certain conditions, the UAM Funds may allow to pay for shares with
securities instead of cash. In addition, the UAM Funds may pay all or part
of your redemption proceeds 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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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; they may be liable for any
losses if they fail to do so. The UAM Funds will not be responsible for
any loss, liability, cost or expense for following instructions received
by telephone that it reasonably believes 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.)
10
<PAGE>
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 tells the UAM Funds to delay redemptions.
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
11
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income and net cap-
ital gains once a year. The UAM Funds will automatically reinvest divi-
dends and distributions in additional shares of the portfolio, unless you
elect on your account application to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in this portfolio. You may also have to pay state and local taxes
on your investment. You should always consult your tax advisor for spe-
cific 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
12
<PAGE>
dividend" and should be avoided. Call 1-877-826-5465 to find out when the
portfolio expects to make a distribution to shareholders.
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
13
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment practices and their associated risks, please read
the "PORTFOLIO SUMMARY" and the statement of additional information (SAI).
You can find information on the portfolio's recent strategies and holdings
in its annual/semi-annual report. As long as it is consistent with its ob-
jective, the portfolio may change these strategies without shareholder ap-
proval.
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry, such as increases
in production costs, or factors directly related to a specific company,
such as decisions made by its management.
Undervalued companies may have experienced adverse business developments
or other events that have caused their stocks to be out of favor. If the
adviser's assessment of a company is wrong, or if the market does not rec-
ognize the value of the company, the price of its stock may fail to meet
expectations and the portfolio's share price may suffer. A value-oriented
portfolio may not perform as well as certain other types of mutual funds
during periods when value stocks are out of favor.
Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. en-
tities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
. Local political, economic, regulatory or social instability, military
action or unrest, or adverse diplomatic developments may affect the
value of foreign investments. A foreign government may act ad-
14
<PAGE>
versely to the interests of U.S. investors. Such actions may include
expropriation or nationalization of assets, confiscatory taxation and
other restrictions on U.S. investment.
. The securities of foreign companies are often denominated in foreign
currencies. Since the portfolio's net asset value is denominated in
U.S. dollars, changes in foreign currency rates and in exchange con-
trol regulations may positively or negatively affect the value of its
securities. In January 1999, certain European nations began to use the
new European common currency, called the Euro. The nations that use
the Euro will have the same monetary policy regardless of their domes-
tic economy, which could have adverse effects on those economies. In
addition, difficulties in converting to the Euro could negatively af-
fect the investments of a portfolio.
. Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those are in the U.S. Securities of some
foreign issuers may be less liquid and more volatile than securities
of comparable U.S. issuers. In addition, the costs associated with
foreign investments, including withholding taxes, brokerage commis-
sions and custodial costs, are generally higher than the costs associ-
ated with U.S. investments.
. Foreign countries have different legal systems and different regula-
tions concerning financial disclosure, accounting and auditing stan-
dards than the U.S. This could make corporate financial information
more difficult to obtain or understand and less reliable than informa-
tion about U.S. companies.
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile
than those in more developed markets, reflecting the greater uncertainties
of investing in less established markets and economies. In particular:
. Countries with emerging markets may have relatively unstable govern-
ments, may present the risks of nationalization of businesses, re-
strictions on foreign ownership and prohibitions on the repatriation
of assets.
. They may protect property rights less than more developed countries.
. The economies of countries with emerging markets may be based on only
a few industries, may be highly vulnerable to changes in local or
global trade conditions and may suffer from extreme and volatile debt
burdens or inflation rates.
15
<PAGE>
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or impos-
sible at times.
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer that are issued by depository banks and gen-
erally trade on an established market in the United States or elsewhere.
Although they are alternatives to directly purchasing the underlying for-
eign securities in their national markets and currencies, ADRs continue to
be subject to many of the risks associated with investing directly in for-
eign securities.
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in derivatives and may deviate from its investment strategies
from time to time. It may also employ investment practices that this pro-
spectus does not describe, such as repurchase agreements, when-issued and
forward commitment transactions, lending of securities, borrowing and
other techniques. For information concerning these investment practices
and their risks, you should read the SAI.
Derivatives
The portfolio may use various derivatives, including futures, forward for-
eign currency exchange contracts, options and swaps to hedge its invest-
ments. 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.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the
16
<PAGE>
portfolio that may result from adverse market, economic, political or
other developments. The portfolio may also invest in these types of secu-
rities to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
Investment Adviser
Murray Johnstone International, Ltd., located in Glasgow, Scotland, is the
investment adviser to the portfolio. The adviser manages and supervises
the investment of the portfolio's assets on a discretionary basis. The ad-
viser, an affiliate of United Asset Management Corporation, is an interna-
tional investment adviser whose origins date back to 1907.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition,
the adviser has voluntarily agreed to limit the expenses of the portfolio
to 1.50% of its average net assets. To maintain this expense limit, the
adviser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. The adviser intends to continue its expense
limitation until further notice.
17
<PAGE>
Portfolio Manager
Since the country decision is of first importance, the Country Allocation
Team is the key decision maker for the portfolio, and their experience and
judgement are critical. The team is James Clunie (Head of Allocation) and
Andrew Preston.
James Clunie is the Senior Investment Officer in charge of North American
clients and a Director of Murray Johnstone International. James is also
responsible for research into the performance and continued development of
the Twenty Questions analysis. James came to Murray Johnstone in 1989 af-
ter receiving his BS with Honors in Mathematics and Statistics from Edin-
burgh University. He has worked in the UK department and spent time in the
US, as a product specialist. He is a Certified Financial Analyst.
Andrew Preston is a Senior Investment Officer and a Director of Murray
Johnstone International. Among his responsibilities is oversight of ac-
counts with special guidelines. He has been with Murray Johnstone for
fourteen years, and has been a member of the UK and Japan teams. He also
played a prominent role in the establishment of a joint venture company
formed in 1986 to invest Japanese Institutional funds internationally.
Earlier in his career, Andrew was a diplomat in the Australian Department
of Foreign Affairs, and he is fluent in Japanese and Chinese.
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Distribution Plans
The UAM Funds have adopted a Distribution Plan and a Shareholder Services
Plan under Rule 12b-1 of the Investment Company Act of 1940 that permit
them to pay broker-dealers, financial institutions and other third parties
for marketing, distribution and shareholder services. The UAM Funds' 12b-1
plans allow them to pay up to 1.00% of its average daily net assets annu-
ally for these services. However, they are currently authorized to pay
only 0.25% per year. Because Institutional Service Class Shares pay these
fees out of their assets on an ongoing basis, over time, your shares may
cost more than if you had paid another type of sales charge. Long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by rules of the National Association of
Securities Dealers, Inc.
18
<PAGE>
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives from such entities an amount equal to up to 33.3% of the portion of
the investment advisory fees attributable to the invested assets of Salo-
mon Smith Barney's eligible customer accounts without regard to any ex-
pense limitation in addition to amounts payable to all selling dealers.
The UAM Funds also compensate Salomon Smith Barney for services it pro-
vides to certain defined contribution plan shareholders that are not oth-
erwise provided by the UAM Funds' administrator.
ADDITIONAL CLASSES OF SHARES
- -------------------------------------------------------------------------------
The portfolio also offers an Institutional Class shares, which do not pay
marketing or shareholder servicing fees.
19
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the fi-
nancial performance of this class of the portfolio for the fiscal periods
indicated. Certain information contained in the table reflects the finan-
cial results for a single portfolio share. The total returns in the table
represent the rate that an investor would have earned on an investment in
the portfolios assuming all dividends and distributions were reinvested.
has audited this information. The financial statements
and the unqualified opinion of are included in the an-
nual report of the portfolio, which is available upon request by calling
the UAM Funds at 1-877-826-5465.
20
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
N/A 902556836 911
</TABLE>
<PAGE>
MJI International Equity Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual/Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
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 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 funds' Investment Company Act of 1940 file number is 811-8544.
<PAGE>
UAM Funds
Funds for the Informed Investor(SM)
Pell Rudman Mid-Cap Growth Portfolio
Institutional Class Prospectus July 31, 1999
UAM(R)
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio? ................................... 1
What are the Principal Investment Strategies of the Portfolio? ............ 1
What are the Principal Risks of the Portfolio ............................. 1
What are the Fees and Expenses of the Portfolio? .......................... 3
Investing with the UAM Funds ................................................. 4
Buying Shares ............................................................. 4
Redeeming Shares .......................................................... 5
Exchanging 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 ................................. 12
Year 2000 ................................................................. 13
Investment Management ..................................................... 14
Shareholder Servicing Arrangements ........................................ 16
Financial Highlights ........................................................ 18
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks long-term capital appreciation. The portfolio cannot
guarantee it will meet its investment objective. The portfolio may change
its investment objective without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
The portfolio normally invests at least 65% of its total assets in common
stocks of medium-sized companies. The adviser selects stocks by focusing
on individual stocks rather than industries or sectors (groups of related
industries). Using a fundamental approach, the adviser emphasizes:
. Companies that can deliver consistently strong earnings growth, cash
flow growth and return on equity.
. Companies that have strong management.
. Companies that will outperform in the future and/or possess a catalyst
that will allow the stock to recognize its potential.
. Diversification in terms of sectors of the economy and the number of
securities.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
1
<PAGE>
Pell Rudman Mid-Cap Growth Portfolio
The portfolio's main risks are those associated with investing in equity
securities using a growth-oriented approach.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or a particu-
lar company.
Growth funds may not perform as well as other types of mutual funds when
growth investing is out of favor. The values of growth stocks may be more
sensitive to changes in current or expected earnings than the values of
other stocks.
2
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<S> <C>
For the fiscal year ended 4/30/99
-----------------------------------------
Management fees 1.00%
-----------------------------------------
Other expenses
-----------------------------------------
Total expenses* 1.00%
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolio. Due to certain expense limits by the adviser and expense off-
sets, investors in the portfolio actually paid the total operating ex-
penses listed in the table below. The adviser may change or cancel its
expense limitation at any time.
<TABLE>
<S> <C>
For the fiscal year ended 4/30/99
-----------------------------------------
Actual Expenses 1.30%
</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 5 Years 10 Years
----------------------------------
<S> <C> <C> <C>
</TABLE>
3
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows.
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Not Available To set up a plan, mail a
Investment Plan completed application to
(Via ACH) 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.
---------------------------------------------------------------------------
Minimum $2,500--regular account $100
Investments $500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
4
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may not exchange shares represented by certif-
icates over the telephone. You may only exchange shares between accounts
with identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der. 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)
5
<PAGE>
on each day the NYSE is open. Therefore, to receive the NAV on any given
day, the UAM Funds must accept your order by 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 business on the same days as the NYSE, which is closed on weekends and
certain holidays.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy, exchange or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy
or sell shares at the NAV of any given day your financial intermediary
must receive your order by the close of trading on the NYSE that day. Your
financial intermediary is responsible for transmitting all subscription
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 NAV 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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. 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, the UAM Funds may allow to pay for shares with
securities instead of cash. In addition, the UAM Funds may pay all or part
of your redemption proceeds with securities instead of cash.
6
<PAGE>
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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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; they may be liable for any
losses if they fail to do so. The UAM Funds will not be responsible for
any loss, liability, cost or expense for following instructions received
by telephone that it reasonably believes 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.
7
<PAGE>
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
8
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income and net cap-
ital gains once a year. The UAM Funds will automatically reinvest divi-
dends and distributions in additional shares of the portfolio, unless you
elect on your account application to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in this portfolio. You may also have to pay state and local taxes
on your investment. You should always consult your tax advisor for spe-
cific 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.
9
<PAGE>
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
10
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment practices and their associated risks, please read
the "PORTFOLIO SUMMARY" and the statement of additional information (SAI).
You can find information on the portfolio's recent strategies and holdings
in its annual/semi-annual report. As long as it is consistent with its ob-
jective, the portfolio may change these strategies without shareholder ap-
proval.
The portfolio normally invests at least 65% of its total assets in common
stocks of medium-sized companies (companies that have market capitaliza-
tions between $200 million and $10 billion at the time of purchase). The
portfolio may also invest in other types of equity securities.
Investment Process
The adviser's stock selection process focuses on individual stocks rather
than industries or sectors (groups of related industries) of the economy.
Using a fundamental approach, the adviser searches for companies that:
. Can deliver consistently strong earnings growth, cash flow growth, and
return on equity. Importantly, the adviser looks for a proven history
of growth because it believes that such a history is indicative of the
value of the underlying franchise or market position. These companies
typically have a proprietary product or business approach that allows
them to be leaders within their respective industries.
. Have strong management that is shareholder oriented and is pursuing a
clear, profit-oriented business strategy.
In addition, the adviser emphasizes diversification in terms of sector ex-
posure as well as the number of securities held, and normally expects low
turnover of holdings.
The adviser narrows potential candidates by looking for companies that
will outperform in the future and/or possess a catalyst that will allow
the stock to recognize its potential. Typical catalysts include:
. New products
. Acceleration in revenues
. Expanding margins
11
<PAGE>
. Companies with strong growth-oriented fundamentals that have experi-
enced a recent (significant) correction in valuation.
. Companies with positive earnings momentum.
Companies are constantly evaluated in terms of growth characteristics rel-
ative to valuations by comparing the price-to-earnings growth rate of cur-
rent portfolio holdings to potential purchase candidates.
The adviser screens the portfolio regularly for potential securities to
sell using both fundamental and quantitative criteria.
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry, such as increases
in production costs, or factors directly related to a specific company,
such as decisions made by its management.
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in foreign securities and may deviate from its investment
strategies from time to time. It may also employ investment practices that
that this prospectus does not describe, such as repurchase agreements,
when-issued and forward commitment transactions, lending of securities,
borrowing and other techniques. For information concerning these invest-
ment practices and their risks, you should read the SAI.
Foreign Securities
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Changes in tax and accounting standards and diffi-
culties obtaining information about foreign companies can negatively af-
fect investment decisions.
12
<PAGE>
In January 1999, certain European nations began to use the new European
common currency, called the Euro. The nations that use the Euro will have
the same monetary policy regardless of their domestic economy, which could
have adverse effects on those economies. In addition, difficulties in con-
verting to the Euro could negatively affect the investments of a portfo-
lio.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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.
13
<PAGE>
INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
Investment Adviser
Pell Rudman Trust Company, N.A., a nationally chartered trust company lo-
cated at 100 Federal Street, Boston, Massachusetts 02110, is the invest-
ment adviser to the portfolio. The adviser manages and supervises the in-
vestment of the portfolio's assets on a discretionary basis. The adviser,
an affiliate of United Asset Management Corporation, has provided compre-
hensive and integrated financial services to individuals and selected in-
stitutional clients since 1980.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition, the
adviser has voluntarily agreed to limit the expenses of the portfolio to
1.30% of its average net assets. To maintain this expense limit, the ad-
viser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. The adviser intends to continue its expense
limitation until further notice.
Portfolio Managers
A team of investment professionals manages the portfolio; however, Jeffrey
S. Thomas has overall responsibility for the day-to-day management of the
portfolios. Listed below are the investment professionals that comprise
that team and a brief description of their business experience.
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Jeffrey S. Thomas, CFA Mr. Thomas joined the adviser in 1996 and he is cur-
rently Chief Investment Officer. Mr. Thomas heads
the Investment Committee and oversees the portfolio
management of all client portfolios of the adviser.
Before joining the adviser, he was Vice President,
Scudder Stevens & Clark, 1981-1986; Senior Invest-
ment Officer, Bank of New England, 1979-1981; and
Investment Officer, The Northern Trust Company,
1973-1979. Mr. Thomas is a member of the Boston Se-
curity Analysts Society, Bank Analysts Association
of Boston and President of Boston Media Analysts
Group. He earned his BS in Finance and Economics
from Miami University (Ohio) and his MBA in Finance
from the University of Chicago. He is a Chartered
Financial Analyst and Chartered Investment Counsel-
or.
-----------------------------------------------------------------------------
Frederick L. Weiss, CFA Mr. Weiss is Director of Research and heads the re-
search efforts of the investment team. Before join-
ing the adviser in 1989, he was Vice President and
Senior Analyst, Adams, Harkness & Hill, 1989; Vice
President State Street Research and Management,
1983-1988; and Analyst, State Street Research and
Management, 1979-1983. Mr. Weiss is a member of the
Boston Security Analyst Society and Healthcare,
Technology and Chemicals Analysts Society. He earned
his AB from Harvard College, Magna Cum Laude, and
his MBA from Harvard Business School, with honors.
He is a Chartered Financial Analyst.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Jay Pearlstein, CFA, CPA Mr. Pearlstein is a Senior Research and Portfolio
Manager for providing equity research on a number
of industries. Before joining the adviser in 1996,
he was a Vice President of the Equity Research De-
partment and on the Investment Policy Committee,
Loomis Sayles & Co., 1981-1996; Staff Analyst, Gulf
Oil Corporation, 1980; and Senior Auditor at Coop-
ers & Lybrand, 1977-1979. Mr. Pearlstein earned his
BA in Accounting from Michigan State University,
Summa Cum Laude. He received the Board of Trustees
Award for graduating first in his class and was the
recipient of a National Merit Scholarship, Finan-
cial Executives Institute Award and Alpha Kappa Psi
Scholarship Key. He also earned his MBA, with dis-
tinction, from Harvard University Graduate School
of Business Administration where he received First-
Year Honors. He is a Chartered Financial Analyst
and a Certified Public Accountant.
</TABLE>
Adviser's Historical Performance
The adviser manages separate accounts that have the same investment objec-
tives as the portfolio. The adviser manages these accounts using tech-
niques and strategies substantially similar, though not always identical,
to those used to manage the portfolio. A composite of the performance of
these separate accounts is listed below. The performance data for the man-
aged accounts reflects deductions for all fees and expenses. All fees and
expenses of the separate accounts were less than the operating expenses of
the portfolio. If the performance of the managed accounts was adjusted to
reflect the fees and expenses of the portfolio, the composite's perfor-
mance would have been lower.
The adviser calculated its performance using the standards of the Associa-
tion for Investment Management and Research. Had the adviser calculated
its performance using the SEC's methods, it results might have differed.
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.
15
<PAGE>
<TABLE>
<CAPTION>
Russell
Pell Rudman Trust Mid-Cap
Company, N.A.* Growth Index
---------------------------------------------------------------------------------------
<S> <C> <C>
Calendar Years Ended:
---------------------------------------------------------------------------------------
1992 35.93% 14.09 %
---------------------------------------------------------------------------------------
1993 28.44% 11.19 %
---------------------------------------------------------------------------------------
1994 2.12% (2.16)%
---------------------------------------------------------------------------------------
1995 36.26% 33.98 %
---------------------------------------------------------------------------------------
1996 18.64% 17.48 %
---------------------------------------------------------------------------------------
1997 22.52% 22.54 %
---------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------
Annualized Return For Various Periods Ended / / (annualized)
1-year
---------------------------------------------------------------------------------------
3-years
---------------------------------------------------------------------------------------
5-years
Cumulative Since Inception (6/1/92)
</TABLE>
* During the period shown (6/1/92 - / / ), fees on the adviser's individ-
ual accounts ranged from 0.50% to 1.00%. The adviser's returns presented
above are net of the average maximum fee of 0.70%. Net returns to in-
vestors vary depending on the management fee.
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
16
<PAGE>
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
17
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of the portfolio for the fiscal periods indicated.
Certain information contained in the table reflects the financial results
for a single portfolio share. The total returns in the table represent the
rate that an investor would have earned on an investment in the portfolios
assuming all dividends and distributions were reinvested. has audited
this information. The financial statements and the unqualified opinion of
are included in the annual report of the portfolio, which is avail-
able upon request by calling the UAM Funds at 1-877-826-5465.
18
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
N/A 902556760 920
</TABLE>
<PAGE>
Pell Rudman Mid-Cap Growth Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 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 funds' Investment Company Act of 1940 file number is 811-8544.
[UAM LOGO APPEARS HERE]
<PAGE>
UAM FUNDS
Funds for the Informed Investor(SM)
TJ Core Equity Portfolio
Institutional Service Class Prospectus July 31, 1999
UAM(R)
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.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Portfolio Summary ............................................................ 1
What is the Objective of the Portfolio? ................................... 1
What are the Principal Investment Strategies of the Portfolio? ............ 1
What are the Principal Risks of the Portfolio? ............................ 1
How Has the Portfolio Performed? .......................................... 2
What are the Fees and Expenses of the Portfolio? .......................... 3
Investing with the UAM Funds ................................................. 4
Buying Shares ............................................................. 4
Redeeming Shares .......................................................... 5
Exchanging 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 ................................. 12
Year 2000 ................................................................. 13
Investment Management ..................................................... 14
Shareholder Servicing Arrangements ........................................ 17
Financial Highlights ........................................................ 19
</TABLE>
<PAGE>
Portfolio Summary
WHAT IS THE OBJECTIVE OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
The portfolio seeks maximum total return consistent with reasonable risk
to principal by investing in the common stock of quality companies with
lower valuations in sectors of the economy exhibiting strong, or improv-
ing, relative performance. The portfolio cannot guarantee it will meet its
investment objective. The portfolio may not change its investment objec-
tive without shareholder approval.
WHAT ARE THE PRINCIPAL INVESTMENT STRATEGIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
This section summarizes the principal investment strategies of the portfo-
lio. For more information see "PRINCIPAL INVESTMENTS AND RISKS OF THE
PORTFOLIO."
Normally, the portfolio invests primarily in common stocks of companies
with market capitalizations of over $800 million at the time of purchase.
The adviser chooses stocks by first examining key economic variables to
identify sectors (groups of related industries) of the economy that ex-
hibit strong or improving economic fundamentals. The adviser then attempts
to invest in companies that offer the best value by emphasizing low cost
industry leaders that are currently out-of-favor and selling at attractive
prices relative to other companies in that sector.
WHAT ARE THE PRINCIPAL RISKS OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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 a portfolio may
be worth more or less than the price that 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.
1
<PAGE>
TJ Core Equity Portfolio
The portfolio's main risks are those associated with investing in equity
securities.
Equity securities may experience sudden, unpredictable drops in value or
long periods of decline in value. This may occur because of factors af-
fecting the securities markets generally, an entire industry or a particu-
lar company.
HOW HAS THE PORTFOLIO PERFORMED?
- -------------------------------------------------------------------------------
The bar chart and table below illustrate how the performance of the port-
folio has varied from year to year and provide some indication of the
risks of investing in the portfolio. The bar chart shows the investment
returns of the portfolio for each full calendar year. The table following
the bar chart compares the average annual returns of the portfolio to
those of a broad-based securities market index. Past performance does not
guarantee future results.
Calendar Year Returns
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
Return Quarter ended
--------------------------------------
<S> <C> <C>
Highest Quarter 20.65% 12/31/98
--------------------------------------
Lowest Quarter 5.90% 9/30/98
--------------------------------------
Year-To-Date 6/30/99
</TABLE>
Average Annual Returns
<TABLE>
<CAPTION>
Average annual return for periods ended 12/31/98 1 Year Since Inception*
---------------------------------------------------------------------------
<S> <C> <C>
TJ Core Equity Portfolio 30.10% 25.60%
---------------------------------------------------------------------------
S&P 500 Index 28.60% 28.08%
</TABLE>
*The fund began operations 9/28/95. Index comparisons begin on 9/30/95.
2
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
Annual Portfolio Operating Expenses (Expenses That Are Deducted From the
Assets of a Portfolio)
This table describes the fees and expenses that you may pay if you buy and
hold shares of the portfolio.
<TABLE>
<CAPTION>
For the fiscal year
ended 4/30/99
----------------------------
<S> <C>
Management Fees 0.75%
----------------------------
Service (12b-1) Fees 0.25%
----------------------------
Other Expenses
----------------------------
Total Expenses* 1.00%
</TABLE>
* Actual Fees and Expenses The ratios stated in the table above are higher
than the expenses you would have actually paid as an investor in the
portfolio. Due to certain expense limits by the adviser and expense off-
sets, investors in the portfolio actually paid the total operating ex-
penses listed in the table below. The adviser intends to continue its
expense limitation until January 1, 2001, but may change or cancel it at
any time.
<TABLE>
<CAPTION>
For the fiscal
year ended
4/30/99
-----------------------
<S> <C>
Actual Expenses 1.25%
</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 5 Years 10 Years
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
3
<PAGE>
Investing with the UAM Funds
BUYING SHARES
- --------------------------------------------------------------------------------
To open an account To buy more shares
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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. wire your money to the UAM
Send your completed ac- Funds as follows.
count application 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: portfolio name/account number/
account name/wire control number
---------------------------------------------------------------------------
By Automatic Not Available To set up a plan, mail a
Investment Plan completed application to
(Via ACH) 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.
---------------------------------------------------------------------------
Minimum $2,500--regular account $100
Investments $500--IRAs $250--
spousal IRAs
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
4
<PAGE>
REDEEMING SHARES
- -------------------------------------------------------------------------------
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 re-
deem.
Certain shareholders may need to include additional docu-
ments. Please see the Statement of Additional Information
(SAI) if you need more information.
---------------------------------------------------------------------------
By Telephone 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.
---------------------------------------------------------------------------
By Systematic Withdrawal Plan (Via ACH)
If your account balance is at least $10,000, you may
transfer as little as $100 per month from your UAM 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.
EXCHANGING SHARES
- -------------------------------------------------------------------------------
At no charge, you may exchange shares of one UAM Fund for shares of the
same class of any other UAM Fund by writing to or calling the UAM Funds.
Before exchanging your shares, please read the prospectus of the UAM Fund
for which you want to exchange. You may obtain any UAM Fund prospectus by
calling 1-877-826-5465. You may not exchange shares represented by certif-
icates over the telephone. You may only exchange shares between accounts
with identical registrations (i.e., the same names and addresses).
TRANSACTION POLICIES
- -------------------------------------------------------------------------------
Calculating Your Share Price
You may buy, sell or exchange shares of a UAM Fund at a price equal to its
net asset value (NAV) next computed after it receives and accepts your or-
der.
5
<PAGE>
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) on each day
the NYSE is open. Therefore, to receive the NAV on any given day, the UAM
Funds must accept your order by 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 business
on the same days as the NYSE, which is closed on weekends and certain hol-
idays.
Securities that are traded on foreign exchanges may trade on days when the
portfolio does not calculate its NAV. Consequently, the value of the port-
folio may change on days when you are unable to purchase or redeem shares
of the portfolio.
Buying or Selling Shares through a Financial Intermediary
You may buy, exchange or sell shares of the UAM Funds through a financial
intermediary (such as a financial planner or adviser). Generally, to buy
or sell shares at the NAV of any given day your financial intermediary
must receive your order by the close of trading on the NYSE that day. Your
financial intermediary is responsible for transmitting all subscription
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 NAV 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 are valued at fair value, according to guidelines established by
the UAM Funds. The UAM Funds may also value securities at fair value when
events occur that make established valuation methods (such as stock ex-
change closing prices) unreliable. 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, the UAM Funds may allow to pay for shares with
securities instead of cash. In addition, the UAM Funds may pay all or part
of your redemption proceeds with securities instead of cash.
6
<PAGE>
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 pur-
chase date. You may avoid these delays by paying for shares with a certi-
fied check, bank check or money order.
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.
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; they may be liable for any
losses if they fail to do so. The UAM Funds will not be responsible for
any loss, liability, cost or expense for following instructions received
by telephone that it reasonably believes 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.
7
<PAGE>
Exchanges
The UAM Funds may:
. Modify or cancel the exchange program at any time on 60 days' written
notice to shareholders.
. Reject any request for an exchange.
. Limit or cancel a shareholder's exchange privilege, especially when an
investor is engaged in a pattern of excessive trading.
8
<PAGE>
Account Policies
SMALL ACCOUNTS
- -------------------------------------------------------------------------------
The UAM Funds may redeem your shares without your permission if the value
of your account falls below 50% of the required minimum initial invest-
ment. 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
- -------------------------------------------------------------------------------
Normally, the portfolio distributes its net investment income and net cap-
ital gains once a year. The UAM Funds will automatically reinvest divi-
dends and distributions in additional shares of the portfolio, unless you
elect on your account application to receive them in cash.
FEDERAL TAXES
- -------------------------------------------------------------------------------
The following is a summary of the federal income tax consequences of in-
vesting in this portfolio. You may also have to pay state and local taxes
on your investment. You should always consult your tax advisor for spe-
cific 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.
9
<PAGE>
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any UAM Fund, you may recognize a
gain or loss for income tax purposes. This gain or loss will be based on
the difference between your tax basis in the shares and the amount you re-
ceive for them. (To aid in computing your tax basis, you should keep your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-
term capital loss to the extent of any capital gain dividends that were
received with respect to the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable, but they may be taxable
in the future.
To the extent the portfolio invests in foreign securities, it may be sub-
ject to foreign withholding taxes with respect to dividends or interest
the portfolio received from sources in foreign countries. The portfolio
may elect to treat some of those taxes as a distribution to shareholders,
which would allow shareholders to offset some of their U.S. federal income
tax.
Backup Withholding
By law, the UAM Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
10
<PAGE>
Portfolio Details
PRINCIPAL INVESTMENTS AND RISKS OF THE PORTFOLIO
- -------------------------------------------------------------------------------
This section briefly describes the principal investment strategies the
portfolio may employ in seeking its objectives. For more information con-
cerning these investment practices and their associated risks, please read
the "PORTFOLIO SUMMARY" and the statement of additional information (SAI).
You can find information on the portfolio's recent strategies and holdings
in its annual/semi-annual report. As long as it is consistent with its ob-
jective, the portfolio may change these strategies without shareholder ap-
proval.
Normally, the portfolio invests at least 65% of its total assets in equity
securities. These investments will consist primarily of common stocks of
companies with market capitalizations greater than $200 million at the
time of purchase. Eighty percent of the common stocks held by the portfo-
lio will be of companies with market capitalizations greater than $800
million. The portfolio may also invest up to 35% of its assets in
investment-grade debt securities. The adviser expects the portfolio to
hold less than 20% of its assets in cash or cash equivalents.
Investment Process
The adviser first analyzes each sector (group of related industries) of
the economy in detail using selected industry screens and then looking at
individual companies. By examining key economic variables the adviser
tries to identify sectors exhibiting strong or improving economic funda-
mentals. Some of the economic factors the adviser considers include the
level and direction of interest rates, forecasted growth in the gross do-
mestic product (GDP), anticipated gains in corporate profits, inflationary
pressures and money supply growth.
The adviser then attempts to invest in companies that offer the best value
by emphasizing industry leaders that are currently out-of-favor and sell-
ing at attractive prices relative to other companies in their industry and
the S&P 500 Index. The adviser is particularly interested in the company's
market value and forecasted earnings and dividends growth over the next 1
to 5 years.
The adviser monitors the valuations of the securities held by the portfo-
lio and sells securities when:
. They reach the target price set by the adviser.
. Their price declines by 20% relative the their industry and the S&P
500.
11
<PAGE>
Equity Securities
Equity securities represent an ownership interest, or the right to acquire
an ownership interest, in an issuer. Different types of equity securities
provide different voting and dividend rights and priority in case of the
bankruptcy of the issuer. Equity securities include common stocks, pre-
ferred stocks, convertible securities, rights and warrants.
Equity securities may lose value because of factors affecting the securi-
ties markets generally, such as adverse changes in economic conditions,
the general outlook for corporate earnings, interest rates or investor
sentiment. These circumstances may lead to long periods of poor perfor-
mance, such as during a "bear market." Equity securities may also lose
value because of factors affecting an entire industry, such as increases
in production costs, or factors directly related to a specific company,
such as decisions made by its management.
OTHER INVESTMENT PRACTICES AND STRATEGIES
- -------------------------------------------------------------------------------
In addition to the principal investments described above, the portfolio
may invest in foreign securities, derivatives and may deviate from its in-
vestment strategies from time to time. It may also employ investment prac-
tices that this prospectus does not describe, such as repurchase agree-
ments, when-issued and forward commitment transactions, lending of securi-
ties, borrowing and other techniques. For information concerning these in-
vestment practices and their risks, you should read the SAI.
Foreign Securities
The portfolio may invest up to 20% of its assets in foreign securities.
Foreign securities, especially those of companies in emerging markets, can
be riskier and more volatile than domestic securities. Adverse political
and economic developments or changes in the value of foreign currency can
make it harder for a portfolio to sell its securities and could reduce the
value of your shares. Changes in tax and accounting standards and diffi-
culties obtaining information about foreign companies can negatively af-
fect investment decisions.
In January 1999, certain European nations began to use the new European
common currency, called the Euro. The nations that use the Euro will have
the same monetary policy regardless of their domestic economy, which could
have adverse effects on those economies. In addition, difficulties in con-
verting to the Euro could negatively affect the investments of a portfo-
lio.
Derivatives
To remain fully invested and to reduce transaction costs, the portfolio
may use derivatives, including futures and options. Derivatives are often
12
<PAGE>
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.
Short-Term Investing
At times, the adviser may decide to suspend temporarily the normal invest-
ment activities of the portfolio by investing up to 100% of its assets in
a variety of securities, such as U.S. government and other high quality
and short-term debt obligations. The adviser may temporarily adopt a de-
fensive position to reduce changes in the value of the shares of the port-
folio that may result from adverse market, economic, political or other
developments. The portfolio may also invest in these types of securities
to earn a return on its cash reserves.
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.
YEAR 2000
- -------------------------------------------------------------------------------
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.
13
<PAGE>
INVESTMENT MANAGEMENT
- -------------------------------------------------------------------------------
Investment Adviser
Tom Johnson Investment Management, a Massachusetts corporation located at
Two Leadership Square, 211 North Robinson, Suite 450, Oklahoma City, Okla-
homa, is the investment adviser to the portfolio. The adviser manages and
supervises the investment of the portfolio's assets on a discretionary ba-
sis. The adviser, an affiliate of United Asset Management Corporation, has
provided investment management services to corporations, unions, pension
and profit sharing plans, trusts, estates and other institutions as well
as individuals since 1983.
During the fiscal year ended April 30, 1999, the portfolio paid the ad-
viser . % of its average net assets in management fees. In addition, the
adviser has voluntarily agreed to limit the expenses of the portfolio to
1.25% of its average net assets. To maintain this expense limit, the ad-
viser may waive a portion of its management fee and/or reimburse certain
expenses of the portfolio. While the adviser intends to continue its ex-
pense limitation until January 1, 2001, it may change or cancel it at any
time.
Portfolio Managers
A team of investment professionals is primarily responsible for the day-
to-day management of the portfolio. Listed below are the investment pro-
fessionals that comprise that team and a brief description of their busi-
ness experience.
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Thomas E. Johnson, CFA Mr. Johnson is currently a Portfolio Manager for the
adviser. From 1981 to 1983, he served as Senior Vice
President and Bank Economist at the First National
Bank and Trust Company of Oklahoma City, where he
managed over $1 billion in investment assets. After
joining the First National Bank in 1975, he served as
the head of Trust Investments until 1981. From 1970
to 1975, he was the Equity and Fixed Income Manager
at Sammons Enterprises, in Dallas, and from 1966 to
1970, an Equity Portfolio Manager at Liberty National
Bank and Trust Company of Oklahoma City. He began his
investment career as an Economic Analyst and later
became a Security Analyst at Republic National Bank
in Dallas. Mr. Johnson earned his B.B.A. in Economics
and his M.B.A. in Finance from Texas Tech University.
He is a Chartered Financial Analyst.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
Jerry L. Wise, CFA, CPA Mr. Wise is currently a Portfolio Manager for the
adviser. Before joining the adviser in June of 1986,
Mr. Wise served as Senior Portfolio Manager and
Equity Strategist for First Investment Management, a
division of First National Bank and Trust Company of
Oklahoma City. In that capacity, he managed $170
million of tax-exempt assets, was Director of Equity
Research/Chairman of the Stock Selection Committee,
and was a member of both the Investment Strategy and
Marketing Committees. Mr. Wise joined First
National's Trust Department in June of 1981 where he
served as Controller in the Trust Department,
Research Analyst, and Portfolio Manager. Other work
experience includes two years as a Staff Auditor for
Peat, Marwick, Mitchell & Company in Tulsa, Oklahoma
and three years in the U.S. Army. He received his
B.B.A. in Accounting and his M.B.A. in Finance from
the University of Oklahoma. He is a Certified Public
Accountant and a Chartered Financial Analyst.
- -------------------------------------------------------------------------------
Richard H. Parry, CFA Mr. Parry is currently a Portfolio Manager for the
adviser. Before joining the adviser in August of
1989, Mr. Parry served as Senior Portfolio Manager
for First Investment Management Corporation (FIMCO),
a subsidiary of First Interstate Bank of Oklahoma
City. In that capacity he was one of four voting
members responsible for the investment and strategy
decision making process. In addition, he was the
primary portfolio manager of FIMCO's intermediate
bond fund and was head of the marketing and client
retention unit. Other work experience included being
a member of the Executive Committee Planning Staff
in 1981 and Staff Auditor in 1980 for First National
Bank and Trust Company of Oklahoma City. He received
his Bachelor of Science Degree in Business from the
University of Colorado and his M.B.A. from Oklahoma
City University. He is a Chartered Financial
Analyst, Adjunct Professor for Oklahoma City
University and past President of the Oklahoma
Society of Financial Analysts.
- -------------------------------------------------------------------------------
Thomas A. Giles, CFA Mr. Giles is a Portfolio Manager for the adviser.
Before joining the adviser in October 1989, Mr.
Giles served as a Portfolio Manager for American
National Insurance Company of Galveston, Texas. In
that capacity, he was one of the voting members of
the Securities Investment Committee, responsible for
individual security selections. Additional
responsibilities included managing the TriFlex Fund,
a conservative yield-oriented balanced fund, as well
as asset allocation decisions and individual
security analysis. Mr. Giles received his Bachelor
of Business and Administration Degree in 1979 and
his M.B.A. in Finance in 1982 from the University of
Texas. He is a Chartered Financial Analyst.
- -------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Manager Experience
-----------------------------------------------------------------------------
<C> <S>
James R. McGlynn, CFA Mr. McGlynn is currently a Portfolio Manager of the
adviser. Before joining the adviser in May of 1991,
Mr. McGlynn served as a Portfolio Manager for
American National Insurance Company of Galveston,
Texas. In that capacity, he was one of the voting
members of the Securities Investment Committee,
responsible for individual security selections.
Additional responsibilities included managing the
American National Income Fund, an $80 million
equity income mutual fund. He began his career as a
Security Analyst at the Permanent University Fund
-- the endowment fund of the University of Texas.
He received his Bachelor of Business Administration
Degree in 1980 from the University of Texas. He is
a Chartered Financial Analyst.
-----------------------------------------------------------------------------
John A. Shepley, CFA Mr. Shepley is currently a Portfolio Manager of the
adviser. Before joining the adviser in August of
1990, Mr. Shepley was employed for seven years at
Sauder Management Company, Dallas, Texas. His
responsibilities included the planning and
execution of portfolio strategies for privately
held profit-sharing and individual investment
accounts, equity research and analysis, and trading
and computer operations. He received his Bachelor
of Business Administration Degree from Midwestern
State University in 1982, and his M.B.A. from
Oklahoma City University. He is a Chartered
Financial Analyst.
-----------------------------------------------------------------------------
Edward L. (Ned) Schrems, Mr. Schrems is currently a Portfolio Manager of the
Ph.D., CFA adviser. Before joining the adviser in March of
1988, Mr. Schrems served as Senior Portfolio
Manager and Director of Equity Investments at
Liberty National Bank and Trust Company and its
successor, Bank One of Oklahoma City. He received
his Bachelor of Business Administration Degree in
1967 and his M.B.A. in 1968 from Michigan State
University. He received his M.S. in 1972 and his
Ph.D. in 1973 from Stanford University. He is a
Chartered Financial Analyst.
-----------------------------------------------------------------------------
Douglas A. Haws, CFA Mr. Haws is currently a Portfolio Manager of the
Adviser. Before joining the adviser in October of
1994, Mr. Haws worked as an International Auditor
at Union Pacific Corporation in Omaha, Nebraska. As
staff auditor his responsibilities included
comprehensive audits of both the financial and
operational aspects of all corporate subsidiaries.
Mr. Haws received his B.B.A. in Finance in 1993
from the University of Oklahoma, and is currently
an adjunct professor at the University. He is a
Chartered Financial Analyst.
</TABLE>
16
<PAGE>
SHAREHOLDER SERVICING ARRANGEMENTS
- -------------------------------------------------------------------------------
Broker, 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 the UAM Funds pay financial representatives.
Distribution Plans
The UAM Funds have adopted a Distribution Plan and a Shareholder Services
Plan under Rule 12b1 of the Investment Company Act of 1940 that permit
them to pay broker-dealers, financial institutions and other third parties
for marketing, distribution and shareholder services. The UAM Funds' 12b-1
plans allow them to pay up to 1.00% of its average daily net assets annu-
ally for these services. However, they are currently authorized to pay
only 0.25% per year. Because Institutional Service Class Shares pay these
fees out of their assets on an ongoing basis, over time, your shares may
cost more than if you had paid another type of sales charge. Long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted by rules of the National Association of
Securities Dealers, Inc.
Fees paid by the UAM Funds To Certain Financial Intermediaries
The UAM Funds may pay financial intermediaries for providing certain serv-
ices to their clients. These services may include record keeping and
transaction processing for shareholders' accounts. These intermediaries
may provide shareholders services the UAM Funds do not currently offer
shareholders that deal directly with the UAM Funds. The UAM Funds will pay
these service providers a pro rata fee based on the assets of the UAM
Funds that are attributable to the service provider. Your service agent
may charge you other account fees for buying or redeeming shares of the
UAM Funds. Your service provider should provide you with a schedule of its
fees and services.
The UAM Funds do not pay these fees on shares purchased directly from UAM
Fund Distributors.
Fees Paid by Affiliates of the UAM Funds
The adviser may pay its affiliated companies for referring investors to
the UAM Funds. The adviser and its affiliates also may, at their own ex-
pense, pay qualified service providers for marketing, shareholder servic-
ing, record-keeping and/or other services performed with respect to the
UAM Funds.
17
<PAGE>
Special Arrangements
UAM Fund Distributors, the adviser and certain of their other affiliates
also participate, as of the date of this prospectus, in an arrangement
with Salomon Smith Barney under which Salomon Smith Barney provides cer-
tain defined contribution plan marketing and shareholder services and re-
ceives from such entities an amount equal to up to 33.3% of the portion of
the investment advisory fees attributable to the invested assets of Salo-
mon Smith Barney's eligible customer accounts without regard to any ex-
pense limitation in addition to amounts payable to all selling dealers.
The UAM Funds also compensate Salomon Smith Barney for services it pro-
vides to certain defined contribution plan shareholders that are not oth-
erwise provided by the UAM Funds' administrator.
18
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the
financial performance of the portfolio for the fiscal periods indicated.
Certain information contained in the table reflects the financial results
for a single portfolio share. The total returns in the table represent the
rate that an investor would have earned on an investment in the portfolios
assuming all dividends and distributions were reinvested. has
audited this information. The financial statements and the unqualified
opinion of are included in the annual report of the portfolio,
which is available upon request by calling the UAM Funds at 1-877-826-
5465.
19
<PAGE>
Portfolio Codes
The reference information below will be helpful to you when you contact
the UAM Funds to purchase or exchange shares, check daily NAVs or get ad-
ditional information.
<TABLE>
<CAPTION>
Trading Symbol CUSIP Number Portfolio Number
-----------------------------------------------------------------------------------------
<S> <C> <C>
TJCEX 902556877 935
</TABLE>
<PAGE>
TJ Core Equity Portfolio
For investors who want more information about the portfolio, the following
documents are available upon request.
Annual and Semi-Annual Reports
The annual and semi-annual reports of the portfolio provide additional in-
formation about its investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that signif-
icantly affected the performance of the portfolio during its last fiscal
year.
Statement of Additional Information
The SAI contains additional detailed information about the portfolio and
is incorporated by reference into (legally part of) this prospectus.
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 the reports of the portfolios 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 funds' Investment Company Act of 1940 file number is 811-8544.
[UAM LOGO APPEARS HERE]
<PAGE>
PART B
UAM FUNDS TRUST
The following statements of additional information are included in this Post-
Effective Amendment No. 31:
. BHM&S Total Return Bond Portfolio
. Cambiar Opportunity Portfolio
. Chicago Asset Management Portfolios
. Clipper Focus Portfolio
. FPA Crescent Portfolio
. Hanson Equity Portfolio
. Jacobs International Octagon Portfolio
. MJI International Equity Portfolio
. Pell Rudman Mid-Cap Growth Portfolio
. TJ Core Equity Portfolio
The statement of additional information of Heitman Real Estate Portfolio is
contained in Post-Effective Amendment No. 30, filed on April 22, 1999.
The statement of additional information of Dwight Capital Preservation Portfolio
is contained in Post-Effective Amendment No. 29, filed on April 12, 1999.
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
BHM&S Total Return Bond Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the portfolio dated July
__, 1999. You may obtain a prospectus for the portfolio by contacting the UAM
Funds at the address listed above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Part I: Portfolio Summary..................................................... I-1
BHM&S TOTAL RETURN BOND PORTFOLIO.......................................... I-2
What Investment Strategies May The Portfolio Use?........................ I-2
What Are The Investment Restrictions Of The Portfolio?................... I-2
Fundamental Policies.................................................. I-2
Non-Fundamental Policies.............................................. I-3
Who Is The Investment Adviser Of The Portfolio?.......................... I-3
How Much Does The Portfolio Pay For Administrative Services?............. I-3
Who Are The Principal Holds Of The Securities Of The Portfolio?.......... I-4
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?... I-4
Average Annual Total Return........................................... I-4
Yield................................................................. I-4
Expenses................................................................. I-4
Part II: The UAM Funds in Detail.............................................. II-1
DESCRIPTION OF PERMITTED INVESTMENTS....................................... II-1
Debt Securities.......................................................... II-1
Types of Debt Securities.............................................. II-1
Terms to Understand................................................... II-5
Factors Affecting the Value of Debt Securities........................ II-6
Derivatives.............................................................. II-7
Types of Derivatives.................................................. II-7
Risks of Derivatives.................................................. II-12
Equity Securities........................................................ II-14
Types of Equity Securities............................................ II-14
Risks of Investing in Equity Securities............................... II-15
Foreign Securities....................................................... II-16
Types of Foreign Securities........................................... II-16
Risks of Foreign Securities........................................... II-17
The Euro.............................................................. II-19
Investment Companies..................................................... II-19
Repurchase Agreements.................................................... II-19
Restricted Securities.................................................... II-20
Securities Lending....................................................... II-20
Short Sales.............................................................. II-20
Description of Short Sales............................................ II-20
Short Sales Against the Box........................................... II-21
Restrictions on Short Sales........................................... II-21
When-Issued, Forward Commitment and Delayed Delivery Transactions........ II-21
MANAGEMENT OF THE FUND..................................................... II-22
INVESTMENT ADVISORY AND OTHER SERVICES..................................... II-24
Investment Adviser....................................................... II-24
Control Of Adviser.................................................... II-24
Investment Advisory Agreement......................................... II-24
Continuing an Advisory Agreement...................................... II-24
Terminating an Advisory Agreement..................................... II-24
Distributor.............................................................. II-25
Administrative Services.................................................. II-25
Administrator......................................................... II-25
Sub-Administrator..................................................... II-26
Sub-Transfer Agent and Sub-Shareholder Servicing Agent................ II-26
Administrative Fees................................................... II-26
Custodian................................................................ II-26
Independent Public Accountant............................................ II-26
BROKERAGE ALLOCATION AND OTHER PRACTICES................................... II-27
Selection of Brokers..................................................... II-27
Simultaneous Transactions................................................ II-27
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Brokerage Commissions.................................................... II-27
Equity Securities..................................................... II-27
Debt Securities....................................................... II-27
CAPITAL STOCK AND OTHER SECURITIES......................................... II-27
The Fund................................................................. II-27
Description Of Shares And Voting Rights.................................. II-28
Description of Shares................................................. II-28
Class Differences..................................................... II-28
Dividends and Capital Gains Distributions................................ II-28
Dividend and Distribution Options..................................... II-28
Taxes on Distributions................................................ II-29
"Buying a Dividend"................................................... II-29
PURCHASE REDEMPTION AND PRICING OF SHARES.................................. II-29
Net Asset Value Per Share................................................ II-29
Calculating NAV....................................................... II-29
How the Fund Values it Assets......................................... II-30
Purchase of Shares....................................................... II-30
In-Kind Purchases..................................................... II-30
Redemption of Shares..................................................... II-31
By Mail............................................................... II-31
By Telephone.......................................................... II-31
Redemptions-In-Kind................................................... II-31
Signature Guarantees.................................................. II-32
Other Redemption Information.......................................... II-32
Exchange Privilege....................................................... II-32
Transfer Of Shares....................................................... II-33
PERFORMANCE CALCULATIONS................................................... II-32
Total Return............................................................. II-33
Yield.................................................................... II-34
Comparisons.............................................................. II-34
TAXES...................................................................... II-35
FINANCIAL STATEMENTS....................................................... II-35
Glossary...................................................................... 11-1
Appendix A: Description of Securities and Ratings............................ 11-1
MOODY'S INVESTORS SERVICE, INC............................................. A-1
Preferred Stock Ratings.................................................. A-1
Debt Ratings - Taxable Debt & Deposits Globally.......................... A-1
Short-Term Prime Rating System - Taxable Debt & Deposits Globally........ A-2
STANDARD & POOR'S RATINGS SERVICES......................................... A-3
Preferred Stock Ratings.................................................. A-3
Long-Term Issue Credit Ratings........................................... A-3
Short-Term Issue Credit Ratings.......................................... A-4
DUFF & PHELPS CREDIT RATING CO............................................. A-5
Long-Term Debt and Preferred Stock....................................... A-5
Short-Term Debt.......................................................... A-5
High Grade............................................................ A-5
Good Grade............................................................ A-6
Satisfactory Grade.................................................... A-6
Non-Investment Grade.................................................. A-6
Default............................................................... A-6
FITCH IBCA RATINGS......................................................... A-6
International Long-Term Credit Ratings................................... A-6
Investment Grade...................................................... A-6
Speculative Grade..................................................... A-6
International Short-Term Credit Ratings............................... A-7
Notes................................................................. A-7
Appendix B - Comparisons...................................................... A-1
</TABLE>
ii
<PAGE>
Part I: Portfolio
Summary
BHM&S TOTAL RETURN BOND PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below
in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments in "What
Are the Investment Policies of the Portfolio?"
. Debt securities rated investment-grade or higher.
. Futures (To hedge and/or manage the duration of the portfolio).
. Options (To hedge and/or manage the duration of the portfolio).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT RESTRICTIONS OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any if its agencies or
instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any one issuer.
I-1
<PAGE>
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3 % of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. 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 purchasing debt securities in accordance with
its investment objectives, (ii) entering into repurchase agreements or
(iii) by lending its portfolio securities to banks, brokers, dealers
and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or
interpretations of the SEC thereunder.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into repurchase transactions.
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio
may change them without shareholder approval. The portfolio will not:
. Invest in futures and/or options on futures unless not more than 5% of
its assets are required as deposit to secure obligations under such
futures and/or options on futures contracts. The portfolio may exclude
from this calculation, options that are in-the-money at the time of
purchase.
. Invest more than 20% of its assets in futures and/or options on
futures.
. 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.
. Purchase on margin or sell short except as specified herein.
. 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).
. Purchase additional securities when its borrowings exceed 5% of its
total assets.
. Pledge, mortgage or hypothecate any of its assets to an extent greater
than 331/3 of its total assets at fair market value.
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Barrow, Hanley Mewhinney & Strauss, Inc.is the investment adviser of the
portfolio. For its services, the portfolio pays its adviser a fee equal to
0.35% of the average daily net assets of the portfolio. For more
information concerning the adviser, see "Investment Advisory and Other
Services" in Part II of this SAI.
I-2
<PAGE>
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM
Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
===========================================================================
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. For more information concerning the
performance of the portfolio, including the way it calculates its
performance figures, see "Performance Calculations" in Part II of this SAI.
Average Annual Total Return
For the Periods Shorter of 10 Years
Ended 4/30/99 1 Year 5 Years or Since Inception Inception Date
===========================================================================
Yield
For the 30-day period ended April 30, 1999, the yield of the portfolio was
____%.
I-3
<PAGE>
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Investment
Advisory Fees Advisory Fees Sub-Administrator Brokerage
Paid Waived Administrator Fee Fee Commissions
==============================================================================================
<S> <C> <C> <C> <C> <C>
1999
----------------------------------------------------------------------------------------------
1998
----------------------------------------------------------------------------------------------
1997
</TABLE>
I-4
<PAGE>
Part II: The UAM Funds in Detail
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
II-1
<PAGE>
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 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.
II-2
<PAGE>
. 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
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
II-3
<PAGE>
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
. 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".
II-4
<PAGE>
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 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
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general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
The portfolio may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing
of mortgage and asset-backed prepayments caused by the variations in
interest rates may also shorten or lengthen the average maturity of the
portfolio. If left unattended, drifts in the average maturity of the
portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the
expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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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 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.
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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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their customers,
as opposed to futures contracts which are traded in only on exchanges
regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to
a commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the
portfolio to assume the risk of fluctuations in the value of the currency
it purchases. Cross hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs.
Otherwise, the portfolio would realize either no gain or a loss on the
purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract.
. In the case of an index, the portfolio of securities that corresponds
to the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price.
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. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
portfolio's exposure to interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements can take many different forms and are known by a variety of
names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease
the overall volatility of the investments of the portfolio and its share
price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence.
. Current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an
instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other resects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
II-14
<PAGE>
the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived
credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits
of owning a company, the portfolio must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made
by its management or lower demand for the company's products or
services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated
to the company or its industry, such as changes in interest rates,
currency exchange rates or inflation rates.
II-15
<PAGE>
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization
falls with the range specified in the prospectus of the portfolio.
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the
over-the-counter market and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities
of small and medium capitalization companies are likely to be less liquid,
and subject to more abrupt or erratic market movements, than securities of
larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
- --------------------------------------------------------------------------------
Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a
foreign currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
II-16
<PAGE>
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. The portfolio may invest in these investment funds
subject to the provisions of the 1940 Act. If a portfolio invests in such
investment funds, its shareholders will bear not only their proportionate
share of the expenses of the portfolio (including operating expenses and
the fees of the adviser), but also will bear indirectly bear similar
expenses of the underlying investment funds. In addition, these investment
funds may trade at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect a portfolio's
investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt.
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends.
. The economies of many foreign countries are dependnt on international
trade and their trading partners and they could be severely affected
if their trading partners were to enact protective trade barriers and
economic conditions.
. The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit ability of a portfolio to
invest a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may
restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
II-17
<PAGE>
applicable United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more
volatile, than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and
erratic price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays
and increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and
their exchange rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces.
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis.
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable.
. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while
the markets for the underlying currencies remain open, certain markets
may not always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
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<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions
on foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed
countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or
impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain separate currencies in any
form. Until then, however, each country and issuers within each country are
free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that will adopt the Euro in all aspects of the investment
process, including trading, foreign exchange, payments, settlements, cash
accounts, custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than
Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by 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.
II-19
<PAGE>
. 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
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolios normally use repurchase agreements to
earn income on assets that are not invested.
When 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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).
II-20
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit
if the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire
at no extra cost. A portfolio will incur transaction costs to open,
maintain and close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio
net assets.
. The market value of the securities of any single issuer that have been
sold short by the portfolio would exceed the two percent (2%) of the
value of the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
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<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited
with the broker is at least equal to the market value of the securities at
the time they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities the portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. The portfolio will only enter
into these types of transactions with the intention of actually acquiring
the securities, but may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, the portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery
date, these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
MANAGEMENT OF THE FUND
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with
the fund for their services as board members. UAM or its affiliates or
CGFSC 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, which is currently comprised of 50 portfolios. Those
people with an asterisk beside their name are "interested persons" of the
Fund as that term is defined in the 1940 Act.
II-22
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
==================================================================================================================
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment
College Road -- RFD 3 Member Management Company, Inc. and Great
Meredith, NH 03253 Island Investment Company, Inc.;
1/26/29 President of Bennett Management Company
from 1988 to 1993.
- ------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife
10 Garden Street Member Fund since January 1999. Formerly, Vice
Cambridge, MA 02138 President for Finance and
8/14/51 Administration and Treasurer of
Radcliffe College from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief
100 King Street West Member Administrative Officer of Philip
P.O. Box 2440, LCD-1 Services Corp.; Formerly, a Partner in
Hamilton Ontario, the Philadelphia office of the law firm
Canada L8N-4J6 Dechert Price & Rhoads and a Director
4/21/42 of Hofler Corp.
- ------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer
16 West Madison Street Member of Broventure Company, Inc.; Chairman
Baltimore, MD 21201 of the Board of Chektec Corporation and
8/5/48 Cyber Scientific, Inc
- ------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, 0 0
211 Congress Street Member Inc. since March 1999 and Vice
Boston, MA 02110 President UAM Trust Company since
2/24/53 January 1996; Principal of UAM Fund
Distributors, Inc. since December 1995;
formerly Vice President of UAM
Investment Services, Inc. from January
1999 to 1996 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
3/21/35 and Trustee of each of the Investment
Chairman Companies of the Eaton Vance Group of
Mutual Funds.
- ------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer 0 0
One Financial Center Member of Dewey Square Investors Corporation
Boston, MA 02111 since 1988; Director and Chief
7/1/43 Executive Officer of H.T. Investors,
Inc., formerly a subsidiary of Dewey
Square.
- ------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief 0 0
One International Place President Financial Officer of United Asset
Boston, MA 02110 Management Corporation.
9/19/47
- ------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI, 0 0
211 Congress Street formerly Vice President of Operations,
Boston, MA 02110 Development and Control of Fidelity
7/4/51 Investments in 1995; Treasurer of the
Fidelity Group of Mutual Funds from 1991
to 1995.
- ------------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of 0 0
211 Congress Street UAMFSI and UAMFDI; Associate Attorney
Boston, MA 02110 of Ropes & Gray (a law firm) from 1993
2/28/68 to 1995.
- ------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; formerly 0 0
211 Congress Street Treasurer Manager of Fund Administration and
Boston, MA 02110 Compliance of CGFSC from 1995 to 1996;
9/18/63 Senior Manager of Deloitte & Touche LLP
from 1985 to 1995,
- ------------------------------------------------------------------------------------------------------------------
Michael J. Leary Assistant Vice President of Chase Global Funds 0 0
73 Tremont Street Treasurer Services Company since 1993. Manager
Boston, MA 02108 of Audit at Ernst & Young from 1988 to
11/23/65 1993.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
==================================================================================================================
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer of Chase Global 0 0
73 Tremont Street Secretary Funds Services Company since 1996.
Boston, MA 02108 Senior Public Accountant with Price
4/12/69 Waterhouse LLP from 1991 to 1994.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each
agreement with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the
portfolios.
. Continuously reviews, supervises and administers the investment
program of the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Advisory Agreement, (2) reckless disregard by the adviser 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
II-24
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-25
<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73
Tremont Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and
DST Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas
City, Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of
UAMSSC is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-26
<PAGE>
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
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
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 Fund changed its
name to "UAM Funds Trust." The Fund's principal executive
II-27
<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes
of shares of beneficial interest without shareholder approval. The Board
has authorized three classes of shares: Institutional Class, Institutional
Service Class, and Advisor Class. Not all of the portfolios issue all of
the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the
election of board members can elect 100% of the board 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 Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional,
Institutional Service and Advisor. The three classes represent interests in
the same assets of the portfolio and, except as discussed below, are
identical in all respects.
. Institutional Service Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights
with respect to matters relating to such distribution expenditures.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
II-28
<PAGE>
Income dividends and capital gains distributions are reinvested in
additional shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net
investment income 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, a portfolio
cannot predict the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a
separate "regulated investment company") for federal tax purposes. The
capital gains/losses of one portfolio will not be offset against the
capital gains/losses of another portfolio.
"Buying a Dividend"
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 just
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.
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.
II-29
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "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.
II-30
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable
II-31
<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in
cash, as the Board may deem advisable; however, payment will be made wholly
in cash unless the governing board believes that economic or market
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth under "Valuation of Shares." A
redeeming shareholder would normally incur brokerage expenses if these
securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will
pay your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
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<PAGE>
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
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<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the
performance of a portfolio. The Fund or UAMFDI may include this information
in sales literature and advertising. Appendix B lists the publications,
indices and averages that the fund may be use. These types of
advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various
independent services that monitor the performance of investment companies,
data reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in
mind that
The composition of the investments in the reported indices and averages may
be different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may
be different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-34
<PAGE>
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, as applicable.
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 the 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, the 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. The
portfolio intends to qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to
withholding and other taxes imposed by foreign countries. These taxes would
reduce the portfolio's dividends but are included in the taxable income
reported on your tax statement if the 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.
FINANCIAL STATEMENTS
The following documents are included in 1999 Annual Report of each
portfolio, other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-35
<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find
information on how the fund calculates this number under "Purchase,
Redemption and Pricing of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description
of Securities and Ratings
II-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, on
CCC 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated D is in payment default. The
D rating category is used when payments on an obligation
are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors' believes
that such payments will be made during such grace period.
The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
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.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection
factors. Risk factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Cambiar Opportunity Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectus of the portfolio dated July
__, 1999. You may obtain a prospectus for the portfolio by contacting the UAM
Funds at the address listed above.
<PAGE>
<TABLE>
<S> <C>
Table Of Contents
Part I: Portfolio Summary................................................... I-1
CAMBIAR OPPORTUNITY PORTFOLIO............................................. I-1
What Investment Strategies May The Portfolio Use?....................... I-1
What Are The Investment Policies Of The Portfolio?...................... I-1
Fundamental Policies................................................... I-1
Non-Fundamental Policies............................................... I-2
Who Is The Investment Adviser Of The Portfolio?......................... I-2
How Much Does The Portfolio Pay For Administrative Services?............ I-2
Who Are The Principal Holds Of The Securities Of The Portfolio?......... I-3
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?.. I-3
Part II: The UAM Funds in Detail............................................ II-1
DESCRIPTION OF PERMITTED INVESTMENTS...................................... II-1
Debt Securities......................................................... II-1
Types of Debt Securities............................................... II-1
Terms to Understand.................................................... II-5
Factors Affecting the Value of Debt Securities......................... II-6
Derivatives............................................................. II-7
Types of Derivatives................................................... II-7
Risks of Derivatives................................................... II-12
Equity Securities....................................................... II-14
Types of Equity Securities............................................. II-14
Risks of Investing in Equity Securities................................ II-15
Foreign Securities...................................................... II-16
Types of Foreign Securities............................................ II-16
Risks of Foreign Securities............................................ II-17
The Euro............................................................... II-19
Investment Companies.................................................... II-19
Repurchase Agreements................................................... II-19
Restricted Securities................................................... II-20
Securities Lending...................................................... II-20
Short Sales............................................................. II-20
Description of Short Sales............................................. II-20
Short Sales Against the Box............................................ II-21
Restrictions on Short Sales............................................ II-21
When-Issued, Forward Commitment and Delayed Delivery Transactions....... II-21
MANAGEMENT OF THE FUND.................................................... II-22
INVESTMENT ADVISORY AND OTHER SERVICES.................................... II-24
Investment Adviser...................................................... II-24
Control Of Adviser..................................................... II-24
Investment Advisory Agreement.......................................... II-24
Continuing an Advisory Agreement....................................... II-24
Terminating an Advisory Agreement...................................... II-24
Distributor............................................................. II-25
Administrative Services................................................. II-25
Administrator.......................................................... II-25
Sub-Administrator...................................................... II-26
Sub-Transfer Agent and Sub-Shareholder Servicing Agent................. II-26
Administrative Fees.................................................... II-26
Custodian............................................................... II-26
Independent Public Accountant........................................... II-26
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. II-26
Selection of Brokers.................................................... II-26
Simultaneous Transactions............................................... II-27
Brokerage Commissions................................................... II-27
Equity Securities...................................................... II-27
Debt Securities........................................................ II-27
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
CAPITAL STOCK AND OTHER SECURITIES....................................... II-27
The Fund............................................................... II-27
Description Of Shares And Voting Rights................................ II-27
Description of Shares................................................. II-27
Class Differences..................................................... II-28
Dividends and Capital Gains Distributions.............................. II-28
Dividend and Distribution Options..................................... II-28
Taxes on Distributions................................................ II-28
"Buying a Dividend"................................................... II-29
PURCHASE REDEMPTION AND PRICING OF SHARES................................ II-29
Net Asset Value Per Share.............................................. II-29
Calculating NAV....................................................... II-29
How the Fund Values it Assets......................................... II-29
Purchase of Shares..................................................... II-30
In-Kind Purchases..................................................... II-30
Redemption of Shares................................................... II-30
By Mail............................................................... II-31
By Telephone.......................................................... II-31
Redemptions-In-Kind................................................... II-31
Signature Guarantees.................................................. II-31
Other Redemption Information.......................................... II-32
Exchange Privilege..................................................... II-32
Transfer Of Shares..................................................... II-32
PERFORMANCE CALCULATIONS................................................. II-32
Total Return........................................................... II-33
Yield.................................................................. II-33
Comparisons............................................................ II-34
TAXES.................................................................... II-34
FINANCIAL STATEMENTS..................................................... II-35
Glossary................................................................... II-1
Appendix A: Description of Securities and Ratings......................... A-1
MOODY'S INVESTORS SERVICE, INC........................................... A-1
Preferred Stock Ratings................................................ A-1
Debt Ratings - Taxable Debt & Deposits Globally........................ A-1
Short-Term Prime Rating System - Taxable Debt & Deposits Globally...... A-2
STANDARD & POOR'S RATINGS SERVICES....................................... A-3
Preferred Stock Ratings................................................ A-3
Long-Term Issue Credit Ratings......................................... A-3
Short-Term Issue Credit Ratings........................................ A-4
DUFF & PHELPS CREDIT RATING CO........................................... A-5
Long-Term Debt and Preferred Stock..................................... A-5
Short-Term Debt........................................................ A-5
High Grade............................................................ A-5
Good Grade............................................................ A-6
Satisfactory Grade.................................................... A-6
Non-Investment Grade.................................................. A-6
Default............................................................... A-6
FITCH IBCA RATINGS....................................................... A-6
International Long-Term Credit Ratings................................. A-6
Investment Grade...................................................... A-6
Speculative Grade..................................................... A-6
International Short-Term Credit Ratings............................... A-7
Notes................................................................. A-7
Appendix B - Comparisons................................................... B-1
</TABLE>
ii
<PAGE>
Part I: Portfolio
Summary
CAMBIAR OPPORTUNITY PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed
below in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments in "What
Are the Investment Policies of the Portfolio?"
. Equity securities (at least 65% in companies with market
capitalizations over $500 million at the time of purchase).
. American Depositary Receipts (up to 25%)
. Futures (to remain fully invested and reduce transaction costs).
. Options (to remain fully invested and reduce transaction costs).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any if its agencies or
instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any one issuer.
I-1
<PAGE>
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3 % of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. 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 purchasing debt securities in accordance with
its investment objectives, (ii) entering into repurchase agreements or
(iii) by lending its portfolio securities to banks, brokers, dealers
and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or
interpretations of the SEC thereunder.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into repurchase transactions.
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio
may change them without shareholder approval. The portfolio will not:
. Invest in futures and/or options on futures unless not more than 5% of
its assets are required as deposit to secure obligations under such
futures and/or options on futures contracts. The portfolio may exclude
from this calculation, options that are in-the-money at the time of
purchase.
. Invest more than 20% of its assets in futures and/or options on
futures.
. 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.
. Purchase on margin or sell short except as specified herein.
. 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).
. Purchase additional securities when its borrowings exceed 5% of its
total assets.
. Pledge, mortgage or hypothecate any of its assets to an extent greater
than 331/3 of its total assets at fair market value.
Who Is The Investment Adviser Of The Portfolio?
Cambiar Investors, Inc. is the investment adviser of the portfolio. For its
services, the portfolio pays its adviser a fee equal to 1.00% of the
average daily net assets of the portfolio. Due to the effect of fee waivers
by the adviser, the actual percentage of average net assets that the
portfolio pays in any given year may be different from the rate set forth
in its contract with the adviser. For more information concerning the
adviser, see "Investment Advisory and Other Services" in Part II of this
SAI.
. How Much Does The Portfolio Pay For Administrative Services?
I-2
<PAGE>
. In exchange for administrative services, the portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
. The portfolio also pays a fee to UAMFSI for sub-administration and
other services provided by CGFSC. The fee, which UAMFSI pays to CGFSC,
is calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM
Funds.
. Who Are The Principal Holders Of The Securities Of The Portfolio?
. As of April 30, 1999, the following persons or organizations held of
record or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. For more information concerning the
performance of the portfolio, including the way it calculates its
performance figures, see "Performance Calculations" in Part II of this SAI.
Average Annual Total Return
<TABLE>
<CAPTION>
Shorter of 10
Years or Since
For the Periods Ended 4/30/99 One Year Five Years Inception Inception Date
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Expenses
Investment Investment Sub-
Advisory Fees Advisory Fees Administrator Administrator Brokerage
Paid Waived Fee Fee Commissions
1999
-------------------------------------------------------------------------------------------------------------
1998
-------------------------------------------------------------------------------------------------------------
1997
</TABLE>
I-3
<PAGE>
Part II: The UAM Funds in
Detail
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
II-1
<PAGE>
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 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.
II-2
<PAGE>
. 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
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
II-3
<PAGE>
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
. 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".
II-4
<PAGE>
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 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
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general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
The portfolio may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing
of mortgage and asset-backed prepayments caused by the variations in
interest rates may also shorten or lengthen the average maturity of the
portfolio. If left unattended, drifts in the average maturity of the
portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the
expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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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 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.
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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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their customers,
as opposed to futures contracts which are traded in only on exchanges
regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to
a commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the
portfolio to assume the risk of fluctuations in the value of the currency
it purchases. Cross hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs.
Otherwise, the portfolio would realize either no gain or a loss on the
purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract.
. In the case of an index, the portfolio of securities that corresponds
to the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price.
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. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
portfolio's exposure to interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements can take many different forms and are known by a variety of
names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease
the overall volatility of the investments of the portfolio and its share
price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence.
. Current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an
instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
- --------------------------------------------------------------------------------
Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other resects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
II-14
<PAGE>
the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived
credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits
of owning a company, the portfolio must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made
by its management or lower demand for the company's products or
services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated
to the company or its industry, such as changes in interest rates,
currency exchange rates or inflation rates.
II-15
<PAGE>
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization
falls with the range specified in the prospectus of the portfolio.
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the over-the-
counter market and might not be traded in volumes typical of securities
traded on a national securities exchange. Thus, the securities of small and
medium capitalization companies are likely to be less liquid, and subject
to more abrupt or erratic market movements, than securities of larger, more
established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
- --------------------------------------------------------------------------------
Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a
foreign currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
II-16
<PAGE>
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. The portfolio may invest in these investment funds
subject to the provisions of the 1940 Act. If a portfolio invests in such
investment funds, its shareholders will bear not only their proportionate
share of the expenses of the portfolio (including operating expenses and
the fees of the adviser), but also will bear indirectly bear similar
expenses of the underlying investment funds. In addition, these investment
funds may trade at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect a portfolio's
investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt.
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends.
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected
if their trading partners were to enact protective trade barriers and
economic conditions.
. The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit ability of a portfolio to
invest a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may
restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
II-17
<PAGE>
applicable United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more
volatile, than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and
erratic price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays
and increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and
their exchange rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces.
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis.
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable.
. The inter-bank market in foreign currencies is a global, around-the-
clock market. To the extent that a market is closed while the markets
for the underlying currencies remain open, certain markets may not
always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
II-18
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions
on foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed
countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or
impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain separate currencies in any
form. Until then, however, each country and issuers within each country are
free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that will adopt the Euro in all aspects of the investment
process, including trading, foreign exchange, payments, settlements, cash
accounts, custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than
Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by 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.
II-19
<PAGE>
. 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
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolios normally use repurchase agreements to
earn income on assets that are not invested.
When 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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).
II-20
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit
if the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire
at no extra cost. A portfolio will incur transaction costs to open,
maintain and close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio
net assets.
. The market value of the securities of any single issuer that have been
sold short by the portfolio would exceed the two percent (2%) of the
value of the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
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<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited
with the broker is at least equal to the market value of the securities at
the time they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities the portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. The portfolio will only enter
into these types of transactions with the intention of actually acquiring
the securities, but may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, the portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery
date, these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
MANAGEMENT OF THE FUND
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with
the fund for their services as board members. UAM or its affiliates or
CGFSC 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, which is currently comprised of 50 portfolios. Those
people with an asterisk beside their name are "interested persons" of the
Fund as that term is defined in the 1940 Act.
II-22
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment
College Road -- RFD 3 Member Management Company, Inc. and Great
Meredith, NH 03253 Island Investment Company, Inc.;
1/26/29 President of Bennett Management
Company from 1988 to 1993.
- ------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife
10 Garden Street Member Fund since January 1999. Formerly,
Cambridge, MA 02138 Vice President for Finance and
8/14/51 Administration and Treasurer of
Radcliffe College from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief
100 King Street West Member Administrative Officer of Philip
P.O. Box 2440, LCD-1 Services Corp.; Formerly, a Partner in
Hamilton Ontario, the Philadelphia office of the law
Canada L8N-4J6 firm Dechert Price & Rhoads and a
4/21/42 Director of Hofler Corp.
- ------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer
16 West Madison Member of Broventure Company, Inc.; Chairman
Street of the Board of Chektec Corporation
Baltimore, MD 21201 and Cyber Scientific, Inc
8/5/48
- ------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, 0 0
211 Congress Street Member Inc. since March 1999 and Vice
Boston, MA 02110 President UAM Trust Company since
2/24/53 January 1996; Principal of UAM Fund
Distributors, Inc. since December
1995; formerly Vice President of UAM
Investment Services, Inc. from January
1999 to 1996 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 0 0
One International Member; a Director of United Asset Management
Place President Corporation; Director, Partner or
Boston, MA 02110 and Trustee of each of the Investment
3/21/35 Chairman Companies of the Eaton Vance Group of
Mutual Funds.
- ------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Board President and Chief Investment Officer 0 0
Jr.* Member of Dewey Square Investors Corporation
One Financial Center since 1988; Director and Chief
Boston, MA 02111 Executive Officer of H.T. Investors,
7/1/43 Inc., formerly a subsidiary of Dewey
Square.
- ------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief 0 0
One International President Financial Officer of United Asset
Place Management Corporation.
Boston, MA 02110
9/19/47
- ------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI, 0 0
211 Congress Street formerly Vice President of Operations,
Boston, MA 02110 Development and Control of Fidelity
7/4/51 Investments in 1995; Treasurer of the
Fidelity Group of Mutual Funds from
1991 to 1995.
- ------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of 0 0
211 Congress Street UAMFSI and UAMFDI; Associate Attorney
Boston, MA 02110 of Ropes & Gray (a law firm) from 1993
2/28/68 to 1995.
- ------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; formerly 0 0
211 Congress Street Treasurer Manager of Fund Administration and
Boston, MA 02110 Compliance of CGFSC from 1995 to 1996;
9/18/63 Senior Manager of Deloitte & Touche
LLP from 1985 to 1995,
- ------------------------------------------------------------------------------------------------------------
Michael J. Leary Assistant Vice President of Chase Global Funds 0 0
73 Tremont Street Treasurer Services Company since 1993. Manager
Boston, MA 02108 of Audit at Ernst & Young from 1988 to
11/23/65 1993.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer of Chase Global 0 0
73 Tremont Street Secretary Funds Services Company since 1996.
Boston, MA 02108 Senior Public Accountant with Price
4/12/69 Waterhouse LLP from 1991 to 1994.
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
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Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each
agreement with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the
portfolios.
. Continuously reviews, supervises and administers the investment
program of the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Advisory Agreement, (2) reckless disregard by the adviser 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
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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
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
DISTRIBUTOR
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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
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Administrator
Pursuant to a Fund Administration Agreement with the Fund, UAMFSI manages,
administers and conducts the general business activities of the Fund. As a
part of its responsibilities, UAMFSI provides and oversees the provision by
various third parties of administrative, fund accounting, dividend
disbursing and transfer agent services for the Fund. UAMFSI, an affiliate
of UAM, has its principal office at 211 Congress Street, Boston,
Massachusetts 02110.
UAMFSI will bear all expenses in connection with the performance of its
services under the Fund Administration Agreement. Other expenses to be
incurred in the operation of the Fund will be borne by the Fund or other
parties, including:
. Taxes, interest, brokerage fees and commissions.
. Salaries and fees of officers and 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.
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. 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73
Tremont Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and
DST Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas
City, Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of
UAMSSC is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
CUSTODIAN
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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
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PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountant for the Fund.
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BROKERAGE ALLOCATION AND OTHER PRACTICES
SELECTION OF BROKERS
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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
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
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 Fund changed its
name to "UAM Funds Trust." The Fund's principal executive
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<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes
of shares of beneficial interest without shareholder approval. The Board
has authorized three classes of shares: Institutional Class, Institutional
Service Class, and Advisor Class. Not all of the portfolios issue all of
the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the
election of board members can elect 100% of the board 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 Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional,
Institutional Service and Advisor. The three classes represent interests in
the same assets of the portfolio and, except as discussed below, are
identical in all respects.
. Institutional Service Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights
with respect to matters relating to such distribution expenditures.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
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Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
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Income dividends and capital gains distributions are reinvested in
additional shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net
investment income 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, a portfolio
cannot predict the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a
separate "regulated investment company") for federal tax purposes. The
capital gains/losses of one portfolio will not be offset against the
capital gains/losses of another portfolio.
"Buying a Dividend"
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 just
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.
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.
II-29
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "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.
II-30
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable
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<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in
cash, as the Board may deem advisable; however, payment will be made wholly
in cash unless the governing board believes that economic or market
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth under "Valuation of Shares." A
redeeming shareholder would normally incur brokerage expenses if these
securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will
pay your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
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time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
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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
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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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the
performance of a portfolio. The Fund or UAMFDI may include this information
in sales literature and advertising. Appendix B lists the publications,
indices and averages that the fund may be use. These types of
advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various
independent services that monitor the performance of investment companies,
data reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in
mind that
The composition of the investments in the reported indices and averages may
be different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may
be different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
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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, as applicable.
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 the 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, the 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. The
portfolio intends to qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to
withholding and other taxes imposed by foreign countries. These taxes would
reduce the portfolio's dividends but are included in the taxable income
reported on your tax statement if the 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.
FINANCIAL STATEMENTS
The following documents are included in 1999 Annual Report of each
portfolio, other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-35
<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find information on
how the fund calculates this number under "Purchase, Redemption and Pricing of
Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board," the NYSE is located on Wall Street and is the largest exchange in the
United States.
Portfolio refers to a single series of the Fund, while portfolios refer to all
of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal agency
that administers most of the federal securities laws in the United States. In
particular, the SEC administers the 1933 ACT, the 1940 ACT and the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same meaning in the
SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description
of Securities and Ratings
II-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, on balance,
CCC 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 To provide more detailed indications of preferred stock quality,
(+) or ratings or from AA to CCC may be modified by the addition of a
minus 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment
on the obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poors' believes that such payments will be made during
such grace period. The D rating also will be used upon the filing of
a bankruptcy petition or the taking of a similar action if payments
on an obligation are jeopardized.
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
BBB- sufficient for prudent investment. Considerable variability
in risk during economic cycles.
BB+/BB/ Below investment grade but deemed likely to meet
BB- obligations when due. Present or prospective financial
protection factors fluctuate according to industry
conditions. Overall quality may move up or down frequently
within this category.
B+/B/B- Below investment grade and possessing risk that obligation
will not be 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.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
A-5
<PAGE>
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, High default risk. Default is a real possibility. Capacity for
CC,C 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, Default. Securities are not meeting current obligations and are
DD,D 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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Chicago Asset Management Portfolios
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectuses of the portfolios dated July
__, 1999. You may obtain a prospectus for a portfolio by contacting the UAM
Funds at the address listed above.
<PAGE>
Table Of Contents
Part I: Portfolio Summaries............................................... I-1
CHICAGO ASSET MANAGEMENT INTERMEDIATE BOND PORTFOLIO................... I-2
What Investment Strategies May The Portfolio Use?.................... I-2
What Are The Investment Policies Of The Portfolio?................... I-2
Fundamental Policies.............................................. I-2
Non-Fundamental Policies.......................................... I-3
Who Is The Investment Adviser Of The Portfolio?...................... I-3
What is the Investment Philosophy and Style of the Adviser?....... I-3
How Much Does The Portfolio Pay For Administrative Services?......... I-4
Who Are The Principal Holds Of The Securities Of The Portfolio?...... I-4
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End? I-4
Average Annual Total Return....................................... I-4
Yield............................................................. I-5
Expenses............................................................. I-5
CHICAGO ASSET MANAGEMENT VALUE/CONTRARIAN PORTFOLIO.................... I-6
What Investment Strategies May The Portfolio Use?.................... I-6
What Are The Investment Policies Of The Portfolio?................... I-6
Fundamental Policies.............................................. I-6
Non-Fundamental Policies.......................................... I-7
Who Is The Investment Adviser Of The Portfolio?...................... I-7
What is the Investment Philosophy and Style of the Adviser?....... I-7
How much does the Portfolio Pay for Administrative Services?......... I-8
Who are the Principal Holds of the Securities of the Portfolio?...... I-8
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End? I-8
Average Annual Total Return....................................... I-8
Expenses............................................................. I-9
Part II: The UAM Funds in Detail.......................................... II-1
DESCRIPTION OF PERMITTED INVESTMENTS................................... II-2
Debt Securities...................................................... II-2
Types of Debt Securities.......................................... II-2
Terms to Understand............................................... II-6
Factors Affecting the Value of Debt Securities.................... II-7
Derivatives.......................................................... II-8
Types of Derivatives.............................................. II-8
Risks of Derivatives.............................................. II-13
Equity Securities.................................................... II-15
Types of Equity Securities........................................ II-15
Risks of Investing in Equity Securities........................... II-16
Foreign Securities................................................... II-17
Types of Foreign Securities....................................... II-17
Risks of Foreign Securities....................................... II-18
The Euro.......................................................... II-20
Investment Companies................................................. II-20
Repurchase Agreements................................................ II-20
Restricted Securities................................................ II-21
Securities Lending................................................... II-21
Short Sales.......................................................... II-22
Description of Short Sales........................................ II-22
Short Sales Against the Box....................................... II-22
Restrictions on Short Sales....................................... II-22
When-Issued, Forward Commitment and Delayed Delivery Transactions.... II-23
MANAGEMENT OF THE FUND................................................. II-23
INVESTMENT ADVISORY AND OTHER SERVICES................................. II-25
Investment Adviser................................................... II-25
Control Of Adviser................................................ II-25
Investment Advisory Agreement..................................... II-25
i
<PAGE>
Continuing an Advisory Agreement................................ II-26
Terminating an Advisory Agreement............................... II-26
Distributor........................................................ II-26
Administrative Services............................................ II-26
Administrator................................................... II-26
Sub-Administrator............................................... II-27
Sub-Transfer Agent and Sub-Shareholder Servicing Agent.......... II-27
Administrative Fees............................................. II-27
Custodian.......................................................... II-27
Independent Public Accountant...................................... II-27
BROKERAGE ALLOCATION AND OTHER PRACTICES............................. II-27
Selection of Brokers............................................... II-27
Simultaneous Transactions.......................................... II-28
Brokerage Commissions.............................................. II-28
Equity Securities............................................... II-28
Debt Securities................................................. II-28
CAPITAL STOCK AND OTHER SECURITIES................................... II-28
The Fund........................................................... II-28
Description Of Shares And Voting Rights............................ II-29
Description of Shares........................................... II-29
Class Differences............................................... II-29
Dividends and Capital Gains Distributions.......................... II-29
Dividend and Distribution Options............................... II-29
Taxes on Distributions.......................................... II-30
"Buying a Dividend"............................................. II-30
PURCHASE REDEMPTION AND PRICING OF SHARES............................ II-30
Net Asset Value Per Share.......................................... II-30
Calculating NAV................................................. II-30
How the Fund Values it Assets................................... II-31
Purchase of Shares................................................. II-31
In-Kind Purchases............................................... II-31
Redemption of Shares............................................... II-32
By Mail......................................................... II-32
By Telephone.................................................... II-32
Redemptions-In-Kind............................................. II-32
Signature Guarantees............................................ II-32
Other Redemption Information.................................... II-33
Exchange Privilege................................................. II-33
Transfer Of Shares................................................. II-34
PERFORMANCE CALCULATIONS............................................. II-34
Total Return....................................................... II-34
Yield.............................................................. II-35
Comparisons........................................................ II-35
TAXES................................................................ II-36
FINANCIAL STATEMENTS................................................. II-36
Glossary................................................................ II-1
Appendix A: Description of Securities and Ratings...................... II-1
MOODY'S INVESTORS SERVICE, INC....................................... A-1
Preferred Stock Ratings............................................ A-1
Debt Ratings - Taxable Debt & Deposits Globally.................... A-1
Short-Term Prime Rating System - Taxable Debt & Deposits Globally.. A-2
STANDARD & POOR'S RATINGS SERVICES................................... A-3
Preferred Stock Ratings............................................ A-3
Long-Term Issue Credit Ratings..................................... A-3
Short-Term Issue Credit Ratings.................................... A-4
DUFF & PHELPS CREDIT RATING CO....................................... A-5
Long-Term Debt and Preferred Stock................................. A-5
Short-Term Debt.................................................... A-5
ii
<PAGE>
High Grade........................................................ A-5
Good Grade........................................................ A-6
Satisfactory Grade................................................ A-6
Non-Investment Grade.............................................. A-6
Default........................................................... A-6
FITCH IBCA RATINGS..................................................... A-6
International Long-Term Credit Ratings............................... A-6
Investment Grade.................................................. A-6
Speculative Grade................................................. A-6
International Short-Term Credit Ratings........................... A-7
Notes............................................................. A-7
Appendix B - Comparisons.................................................. A-1
iii
<PAGE>
Part I: Portfolio Summaries
<PAGE>
CHICAGO ASSET MANAGEMENT INTERMEDIATE BOND PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below
in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments in "What
Are the Investment Policies of the Portfolio?"
. Investment-Grade debt securities (at least 65% of its assets in
intermediate-term investment-grade debt securities).
. Below investment-grade debt securities (up to 10% of its total assets).
. Foreign securities (up to 10% of its total assets).
. Futures (for hedging purposes only).
. Options (to enhance income or hedge risk).
. Forward currency exchange contracts (for hedging purposes only).
. Swaps (for hedging purposes only).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any if its agencies or
instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
I-2
<PAGE>
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3 % of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. 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 purchasing debt securities in accordance with
its investment objectives and policies, (ii) entering into repurchase
agreements or (iii) by lending its portfolio securities to banks,
brokers, dealers and other financial institutions so long as such loans
are not inconsistent with the 1940 Act or the rules and regulations or
interpretations of the SEC thereunder.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii) entering
into options, futures or repurchase transactions.
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio
may change them without shareholder approval. The portfolio will not:
. Invest in futures and/or options on futures unless not more than 5% of
its assets are required as deposit to secure obligations under such
futures and/or options on futures contracts. The portfolio may exclude
from this calculation, options that are in-the-money at the time of
purchase.
. Invest more than 20% of its assets in futures and/or options on futures.
. 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.
. Purchase on margin or sell short except as specified herein.
. 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).
. Purchase additional securities when its borrowings exceed 5% of its
total assets.
. Pledge, mortgage or hypothecate any of its assets to an extent greater
than 33 1/3 of its total assets at fair market value.
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Chicago Asset Management Company is the investment adviser of the
portfolio. For its services, the portfolio pays its adviser a fee equal to
0.48% of the average daily net assets of the portfolio. Due to the effect
of fee waivers by the adviser, the actual percentage of average net assets
that the portfolio pays in any given year may be different from the rate
set forth in its contract with the adviser. For more information concerning
the adviser, see "Investment Advisory and Other Services" in Part II of
this SAI.
I-3
<PAGE>
What is the Investment Philosophy and Style of the Adviser?
The adviser's approach is predicated on a controlled risk strategy that
attempts to avoid dependence on interest rate anticipation while
emphasizing value added through sector rotation and yield curve analysis.
The firm seeks to add value by improving the odds in a risk/reward
equation. The adviser focuses on the more traditional aspects of active
portfolio management by scrutinizing sectors, coupons, call features, and
the shape of the yield curve. The adviser attempts to constructs the
portfolio for income and safety.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. For more information concerning the
performance of the portfolio, including the way it calculates its
performance figures, see "Performance Calculations" in Part II of this SAI.
Average Annual Total Return
For the Periods Shorter of 10 Years
Ended 4/30/99 1 Year 5 Years or Since Inception Inception Date
---------------------------------------------------------------------------
I-4
<PAGE>
Yield
For the 30-dayperiod ended April 30, 1999, the yield of the portfolio was
____%.
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Investment
Advisory Fees Advisory Fees Administrator Sub-Administrator Brokerage
Paid Waived Fee Fee Commissions
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
---------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------
1997
</TABLE>
I-5
<PAGE>
CHICAGO ASSET MANAGEMENT VALUE/CONTRARIAN PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below
in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments in "What
Are the Investment Policies of the Portfolio?"
. Equity securities (at least 65% of its total assets).
. Below investment-grade debt securities (up to 5% of its total assets).
. Foreign securities (up to 10% of its total assets in foreign securities
and up to 25% of its total assets in American Depositary Receipts).
. Futures (for hedging purposes only).
. Forward currency exchange contracts (for hedging purposes only).
. Options (for hedging purposes only).
. Swaps (for hedging purposes only).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any if its agencies or
instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies.
I-6
<PAGE>
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3 % of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. 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 purchasing debt securities in accordance with
its investment objectives and policies, (ii) entering into repurchase
agreements or (iii) by lending its portfolio securities to banks,
brokers, dealers and other financial institutions so long as such loans
are not inconsistent with the 1940 Act or the rules and regulations or
interpretations of the SEC thereunder.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii) entering
into options, futures or repurchase transactions.
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio
may change them without shareholder approval. The portfolio will not:
. Invest in futures and/or options on futures unless not more than 5% of
its assets are required as deposit to secure obligations under such
futures and/or options on futures contracts. The portfolio may exclude
from this calculation, options that are in-the-money at the time of
purchase.
. Invest more than 20% of its assets in futures and/or options on futures.
. 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.
. Purchase on margin or sell short except as specified herein.
. 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).
. Purchase additional securities when its borrowings exceed 5% of its
total assets.
. Pledge, mortgage or hypothecate any of its assets to an extent greater
than 33 1/3 of its total assets at fair market value.
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Chicago Asset Management Company is the investment adviser of the
portfolio. For its services, the portfolio pays its adviser a fee equal to
0.625% of the average daily net assets of the portfolio. Due to the effect
of fee waivers by the adviser, the actual percentage of average net assets
that the portfolio pays in any given year may be different from the rate
set forth in its contract with the adviser. For more information concerning
the adviser, see "Investment Advisory and Other Services" in Part II of
this SAI.
What is the Investment Philosophy and Style of the Adviser?
The adviser views itself as an equity manager who, by combining value
judgment and contrarian opinion, strives to outperform the market and other
money managers not by market timing, but by
I-7
<PAGE>
focusing on the selection of individual securities. Categorized as a large
cap, bottom-up, value/contrarian strategy, the adviser's philosophy and
strategy are qualitative and have remained the same since the inception of
the firm.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.06% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. For more information concerning the
performance of the portfolio, including the way it calculates its
performance figures, see "Performance Calculations" in Part II of this SAI.
Average Annual Total Return
For the Periods Shorter of 10 Years
Ended 4/30/99 1 Year 5 Years or Since Inception Inception Date
---------------------------------------------------------------------------
I-8
<PAGE>
<TABLE>
<CAPTION>
EXPENSES
- --------------------------------------------------------------------------------
Investment Investment
Advisory Fees Advisory Fees Administrator Sub-Administrator Brokerage
Paid Waived Fee Fee Commissions
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
---------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------
1997
</TABLE>
I-9
<PAGE>
Part II: The UAM Funds in
Detail
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
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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 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.
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. 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
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
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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
. 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".
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Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are
sold at a discount from their face value. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. The amount
of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. The market value of zero coupon
securities may exhibit greater price volatility than ordinary debt
securities because a stripped security will have a longer duration than an
ordinary debt security with the same maturity. The portfolio's investments
in pay-in-kind, delayed and zero coupon bonds may require it to sell
certain of its portfolio securities to generate sufficient cash to satisfy
certain income distribution requirements.
These securities may include 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 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
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general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
The portfolio may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing
of mortgage and asset-backed prepayments caused by the variations in
interest rates may also shorten or lengthen the average maturity of the
portfolio. If left unattended, drifts in the average maturity of the
portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the
expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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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 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.
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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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed
to futures contracts which are traded in only on exchanges regulated by
the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the
portfolio to assume the risk of fluctuations in the value of the currency
it purchases. Cross hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs.
Otherwise, the portfolio would realize either no gain or a loss on the
purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract.
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price.
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. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
portfolio's exposure to interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements can take many different forms and are known by a variety of
names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease
the overall volatility of the investments of the portfolio and its share
price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence.
. Current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an instrument
stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other resects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
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the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived
credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits
of owning a company, the portfolio must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated to
the company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization
falls with the range specified in the prospectus of the portfolio.
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the
over-the-counter market and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities
of small and medium capitalization companies are likely to be less liquid,
and subject to more abrupt or erratic market movements, than securities of
larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
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international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. The portfolio may invest in these investment funds
subject to the provisions of the 1940 Act. If a portfolio invests in such
investment funds, its shareholders will bear not only their proportionate
share of the expenses of the portfolio (including operating expenses and
the fees of the adviser), but also will bear indirectly bear similar
expenses of the underlying investment funds. In addition, these investment
funds may trade at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect a portfolio's
investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt.
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends.
. The economies of many foreign countries are dependnt on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and
economic conditions.
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other
countries or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit ability of a portfolio to invest
a particular country or make it very expensive for the portfolio to
invest in that country. Some countries require prior governmental
approval, limit the types or amount of securities or companies in which
a foreigner can invest. Other countries may restrict the ability of
foreign investors to repatriate their investment income and capital
gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
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applicable United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and
erratic price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and their
exchange rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in response
to other market forces.
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis.
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable.
. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while the
markets for the underlying currencies remain open, certain markets may
not always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
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Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or
impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain separate currencies in any
form. Until then, however, each country and issuers within each country are
free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that will adopt the Euro in all aspects of the investment
process, including trading, foreign exchange, payments, settlements, cash
accounts, custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
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A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by 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.
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. 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.
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).
II-21
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit
if the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire
at no extra cost. A portfolio will incur transaction costs to open,
maintain and close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio net
assets.
. The market value of the securities of any single issuer that have been
sold short by the portfolio would exceed the two percent (2%) of the
value of the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any class
of the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
II-22
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited
with the broker is at least equal to the market value of the securities at
the time they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities the portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. The portfolio will only enter
into these types of transactions with the intention of actually acquiring
the securities, but may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, the portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery
date, these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
MANAGEMENT OF THE FUND
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with
the fund for their services as board members. UAM or its affiliates or
CGFSC 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, which is currently comprised of 50 portfolios. Those
people with an asterisk beside their name are "interested persons" of the
Fund as that term is defined in the 1940 Act.
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management
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
10 Garden Street Member since January 1999. Formerly, Vice President
Cambridge, MA 02138 for Finance and Administration and Treasurer
8/14/51 of Radcliffe College from 1991 to 1999.
---------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief
100 King Street West Member Administrative Officer of Philip Services
P.O. Box 2440, LCD-1 Corp.; Formerly, a Partner in the
Hamilton Ontario, Philadelphia office of the law firm
Canada L8N-4J6 Dechert Price & Rhoads and a Director of
4/21/42 Hofler Corp.
---------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of
16 West Madison Street Member Broventure Company, Inc.; Chairman of the
Baltimore, MD 21201 Board of Chektec Corporation and Cyber
8/5/48 Scientific, Inc
---------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, Inc. 0 0
211 Congress Street Member since March 1999 and Vice President UAM
Boston, MA 02110 Trust Company since January 1996;
2/24/53 Principal of UAM Fund Distributors, Inc.
since December 1995; formerly Vice
President of UAM Investment Services, Inc.
from January 1999 to 1996 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 Member; Director of United Asset Management
Place President Corporation; Director, Partner or Trustee
Boston, MA 02110 and of each of the Investment Companies of the
3/21/35 Chairman Eaton Vance Group of Mutual Funds.
---------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of
One Financial Center Member Dewey Square Investors Corporation since 0 0
Boston, MA 02111 1988; Director and Chief Executive Officer
7/1/43 of H.T. Investors, Inc., formerly a
subsidiary of Dewey Square.
---------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and Chief 0 0
One International President Financial Officer of United Asset
Place Management Corporation.
Boston, MA 02110
9/19/47
---------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI, formerly 0 0
211 Congress Street Vice President of Operations, Development
Boston, MA 02110 and Control of Fidelity Investments in
7/4/51 1995; Treasurer of the Fidelity Group of
Mutual Funds from 1991 to 1995.
---------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of 0 0
211 Congress Street UAMFSI and UAMFDI; Associate Attorney of
Boston, MA 02110 Ropes & Gray (a law firm) from 1993 to
2/28/68 1995.
---------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; formerly Manager 0 0
211 Congress Street Treasurer of Fund Administration and Compliance of
Boston, MA 02110 CGFSC from 1995 to 1996; Senior Manager of
9/18/63 Deloitte & Touche LLP from 1985 to 1995,
---------------------------------------------------------------------------------------------------------------
Michael J. Leary Assistant Vice President of Chase Global Funds 0 0
73 Tremont Street Treasurer Services Company since 1993. Manager of
Boston, MA 02108 Audit at Ernst & Young from 1988 to 1993.
11/23/65
---------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 ADVISE
- -------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each
agreement with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the portfolios.
. Continuously reviews, supervises and administers the investment program
of the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Advisory Agreement, (2) reckless disregard by the adviser 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
II-25
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Members who are not parties to the Investment Advisory
Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-26
<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73
Tremont Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and
DST Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas
City, Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of
UAMSSC is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-27
<PAGE>
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
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
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 Fund changed its
name to "UAM Funds Trust." The Fund's principal executive
II-28
<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes
of shares of beneficial interest without shareholder approval. The Board
has authorized three classes of shares: Institutional Class, Institutional
Service Class, and Advisor Class. Not all of the portfolios issue all of
the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the
election of board members can elect 100% of the board 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 Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional,
Institutional Service and Advisor. The three classes represent interests in
the same assets of the portfolio and, except as discussed below, are
identical in all respects.
. Institutional Service Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights
with respect to matters relating to such distribution expenditures.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
II-29
<PAGE>
Income dividends and capital gains distributions are reinvested in
additional shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net
investment income 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, a portfolio
cannot predict the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a
separate "regulated investment company") for federal tax purposes. The
capital gains/losses of one portfolio will not be offset against the
capital gains/losses of another portfolio.
"Buying a Dividend"
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 just
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.
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.
II-30
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "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.
II-31
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable
II-32
<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in
cash, as the Board may deem advisable; however, payment will be made wholly
in cash unless the governing board believes that economic or market
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth under "Valuation of Shares." A
redeeming shareholder would normally incur brokerage expenses if these
securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will
pay your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
II-33
<PAGE>
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
II-34
<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the
performance of a portfolio. The Fund or UAMFDI may include this information
in sales literature and advertising. Appendix B lists the publications,
indices and averages that the fund may be use. These types of
advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various
independent services that monitor the performance of investment companies,
data reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in
mind that
The composition of the investments in the reported indices and averages may
be different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may
be different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-35
<PAGE>
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, as applicable.
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 the 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, the 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. The
portfolio intends to qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to
withholding and other taxes imposed by foreign countries. These taxes would
reduce the portfolio's dividends but are included in the taxable income
reported on your tax statement if the 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.
FINANCIAL STATEMENTS
The following documents are included in 1999 Annual Report of each
portfolio, other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-36
<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find
information on how the fund calculates this number under "Purchase,
Redemption and Pricing of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description
of Securities and Ratings
II-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 aaa
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 b
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 caa 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 c 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.
Ba Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. 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 B 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 Caa 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 C 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 Prime-1
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, CCC Preferred stock rated BB, B, and CCC are regarded, 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. This indicates that no rating
has been requested, that there is insufficient information on
which to base a
N.R. 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 A 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 The ratings from AA to CCC may be modified by the addition of
minus (-) 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
D A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has
not expired, unless Standard & Poors' believes that such
payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation
are jeopardized.
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.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Clipper Focus Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectuses of the portfolios dated July
__, 1999. You may obtain a prospectus for a portfolio by contacting the UAM
Funds at the address listed above.
<PAGE>
<TABLE>
Table Of Contents
<S> <C>
Part I: Portfolio Summary.................................................... I-2
CLIPPER FOCUS PORTFOLIO................................................... I-2
What Investment Strategies May The Portfolio Use?....................... I-2
What Are The Investment Policies Of The Portfolio?...................... I-2
Fundamental Policies................................................. I-2
Non-Fundamental Policies............................................. I-2
Who Is The Investment Adviser Of The Portfolio?......................... I-3
How Much Does The Portfolio Pay For Administrative Services?............ I-3
Who Are The Principal Holders Of The Securities Of The Portfolio?....... I-3
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?.. I-4
Average Annual Total Return.......................................... I-4
Expenses................................................................ I-4
Part II: The UAM Funds in Detail............................................. II-1
DESCRIPTION OF PERMITTED INVESTMENTS...................................... II-2
Debt Securities......................................................... II-2
Types of Debt Securities............................................. II-2
Terms to Understand.................................................. II-6
Factors Affecting the Value of Debt Securities....................... II-7
Derivatives............................................................. II-8
Types of Derivatives................................................. II-8
Risks of Derivatives................................................. II-13
Equity Securities....................................................... II-15
Types of Equity Securities........................................... II-15
Risks of Investing in Equity Securities.............................. II-16
Foreign Securities...................................................... II-17
Types of Foreign Securities.......................................... II-17
Risks of Foreign Securities.......................................... II-18
The Euro............................................................. II-20
Investment Companies.................................................... II-20
Repurchase Agreements................................................... II-20
Restricted Securities................................................... II-21
Securities Lending...................................................... II-21
Short Sales............................................................ II-21
Description of Short Sales........................................... II-21
Short Sales Against the Box.......................................... II-22
Restrictions on Short Sales.......................................... II-22
When-Issued, Forward Commitment and Delayed Delivery Transactions....... II-22
MANAGEMENT OF THE FUND.................................................... II-23
INVESTMENT ADVISORY AND OTHER SERVICES.................................... II-25
Investment Adviser...................................................... II-25
Control Of Adviser................................................... II-25
Investment Advisory Agreement........................................ II-25
Continuing an Advisory Agreement..................................... II-25
Terminating an Advisory Agreement.................................... II-25
Distributor............................................................. II-26
Administrative Services................................................. II-26
Administrator........................................................ II-26
Sub-Administrator.................................................... II-27
Sub-Transfer Agent and Sub-Shareholder Servicing Agent............... II-27
Administrative Fees.................................................. II-27
Custodian............................................................... II-27
Independent Public Accountant........................................... II-27
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. II-27
Selection of Brokers.................................................... II-27
Simultaneous Transactions............................................... II-28
Brokerage Commissions................................................... II-28
Equity Securities.................................................... II-28
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Debt Securities.................................................. II-28
CAPITAL STOCK AND OTHER SECURITIES.................................... II-28
The Fund............................................................ II-28
Description Of Shares And Voting Rights............................. II-28
Description of Shares............................................ II-28
Class Differences................................................ II-29
Dividends and Capital Gains Distributions........................... II-29
Dividend and Distribution Options................................ II-29
Taxes on Distributions........................................... II-29
"Buying a Dividend".............................................. II-30
PURCHASE REDEMPTION AND PRICING OF SHARES............................. II-30
Net Asset Value Per Share........................................... II-30
Calculating NAV.................................................. II-30
How the Fund Values it Assets.................................... II-30
Purchase of Shares.................................................. II-31
In-Kind Purchases................................................ II-31
Redemption of Shares................................................ II-31
By Mail.......................................................... II-32
By Telephone..................................................... II-32
Redemptions-In-Kind.............................................. II-32
Signature Guarantees............................................. II-32
Other Redemption Information..................................... II-33
Exchange Privilege.................................................. II-33
Transfer Of Shares.................................................. II-33
PERFORMANCE CALCULATIONS.............................................. II-33
Total Return........................................................ II-34
Yield............................................................... II-34
Comparisons......................................................... II-35
TAXES................................................................. II-35
FINANCIAL STATEMENTS.................................................. II-36
Glossary................................................................. II-1
Appendix A: Description of Securities and Ratings....................... II-1
MOODY'S INVESTORS SERVICE, INC........................................ A-1
Preferred Stock Ratings............................................. A-1
Debt Ratings - Taxable Debt & Deposits Globally..................... A-1
Short-Term Prime Rating System - Taxable Debt & Deposits Globally... A-2
STANDARD & POOR'S RATINGS SERVICES.................................... A-3
Preferred Stock Ratings............................................. A-3
Long-Term Issue Credit Ratings...................................... A-3
Short-Term Issue Credit Ratings..................................... A-4
DUFF & PHELPS CREDIT RATING CO........................................ A-5
Long-Term Debt and Preferred Stock.................................. A-5
Short-Term Debt..................................................... A-5
High Grade....................................................... A-5
Good Grade....................................................... A-6
Satisfactory Grade............................................... A-6
Non-Investment Grade............................................. A-6
Default.......................................................... A-6
FITCH IBCA RATINGS.................................................... A-6
International Long-Term Credit Ratings.............................. A-6
Investment Grade................................................. A-6
Speculative Grade................................................ A-6
International Short-Term Credit Ratings.......................... A-7
Notes............................................................ A-7
Appendix B - Comparisons................................................. A-1
</TABLE>
ii
<PAGE>
Part I: Portfolio Summary
CLIPPER FOCUS PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed
below in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
ability of the portfolio to use these investments in "What Are the
Investment Policies of the Portfolio?"
. Equity securities.
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. 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 purchasing debt securities in accordance
with its investment objectives; and (ii) by lending its portfolio
securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
1940 Act, or the rules and regulations or interpretations of the
Commission thereunder.
. Underwrite the securities of other issuers.
I-2
<PAGE>
. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Portfolio from
(i) making any permitted borrowings, mortgages or pledges, or (ii)
entering into repurchase transactions.
. Borrow, except from banks and as a temporary measure for
extraordinary or emergency purposes and then, in no event, in excess
of 33 1/3% of the portfolio's gross assets valued at the lower of
market or cost.
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.
. 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).
. 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.
. With respect to 50% of its total assets, purchase the securities of
any issuer (other than obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities) if, as a result,
(i) more than 5% of the value of its total assets would be invested
in the securities of any single issuer, or (ii) it would hold more
than 10% of the outstanding voting securities of such issuer, or
(iii) with respect to the remaining 50% of its total assets, more
than 25% of the value of its total assets would be invested in the
securities of any single issuer.
. Purchase additional securities when its borrowings exceed 5% of its
total assets.
. Pledge, mortgage or hypothecate any of its assets to an extent
greater than 33 1/3 of its total assets at fair market value.
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Pacific Financial Research, Inc.is the investment adviser of the
portfolio. For its services, the portfolio pays its adviser a fee equal
to:
. 1.00% on the first $500 million in average daily net assets, plus
. 0.95% of the next $500 million in average daily net assets, plus
. 0.90% on average daily net assets in excess of $1 billion.
Due to the effect of fee waivers by the adviser, the actual percentage of
average net assets that the portfolio pays in any given year may be
different from the rate set forth in its contract with the adviser. For
more information concerning the adviser, see "Investment Advisory and
Other Services" in Part II of this SAI.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to
UAMFSI calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
I-3
<PAGE>
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM
Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of
record or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
==========================================================================
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is
defined in the 1940 Act) the portfolio. Shareholders controlling the
portfolio could have the ability to vote a majority of the shares of the
portfolio on any matter requiring the approval of shareholders of the
portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings
and are not intended to indicate future performance. The portfolio
calculates its current yield and average annual total return information
according to the methods required by the SEC. For more information
concerning the performance of the portfolio, including the way it
calculates its performance figures, see "Performance Calculations" in Part
II of this SAI.
Average Annual Total Return
For the Periods Shorter of 10 Years
Ended 4/30/99 1 Year 5 Years or Since Inception Inception Date
==========================================================================
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Investment
Advisory Fees Advisory Fees Administrator Sub-Administrator Brokerage
Paid Waived Fee Fee Commissions
========================================================================================
<S> <C> <C> <C> <C> <C>
1999
----------------------------------------------------------------------------------------
1998
----------------------------------------------------------------------------------------
1997
</TABLE>
I-4
<PAGE>
Part II: The UAM Funds in Detail
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
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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 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.
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. 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
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
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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
. 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".
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Zero Coupon Bonds
These securities make no periodic payments of interest, but instead are
sold at a discount from their face value. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. The amount
of the discount rate varies depending on factors including the time
remaining until maturity, prevailing interest rates, the security's
liquidity and the issuer's credit quality. The market value of zero coupon
securities may exhibit greater price volatility than ordinary debt
securities because a stripped security will have a longer duration than an
ordinary debt security with the same maturity. The portfolio's investments
in pay-in-kind, delayed and zero coupon bonds may require it to sell
certain of its portfolio securities to generate sufficient cash to satisfy
certain income distribution requirements.
These securities may include 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 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
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general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if
the price of the debt security remains unchanged during the holding period
and coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security
and interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction
from interest rates (i.e., if interest rates go up, the value of the bond
will go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
The portfolio may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing
of mortgage and asset-backed prepayments caused by the variations in
interest rates may also shorten or lengthen the average maturity of the
portfolio. If left unattended, drifts in the average maturity of the
portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the
expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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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 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.
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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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their
customers, as opposed to futures contracts which are traded in only
on exchanges regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the
currency trader who is a party to the original forward contract, as
opposed to a commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for
the delivery of one foreign currency in exchange for another foreign
currency, including currencies in which its securities are not then
denominated. This may include shifting exposure from U.S. dollars to a
foreign currency, or from one foreign currency to another foreign
currency. This type of strategy, sometimes known as a "cross-hedge," will
tend to reduce or eliminate exposure to the currency that is sold, and
increase exposure to the currency that is purchased. Cross-hedges protect
against losses resulting from a decline in the hedged currency, but will
cause the portfolio to assume the risk of fluctuations in the value of the
currency it purchases. Cross hedging transactions also involve the risk of
imperfect correlation between changes in the values of the currencies
involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign
currency on the spot market if the market value of a security it is
hedging is less than the amount of foreign currency it is obligated to
deliver. Conversely, the portfolio may have to sell on the spot market
some of the foreign currency it received upon the sale of a security if
the market value of such security exceeds the amount of foreign currency
it is obligated to deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of
securities that it does not own. The portfolio would ordinarily realize a
gain if, during the option period, the value of the underlying securities
decreased below the exercise price sufficiently to cover the premium and
transaction costs. However, if the price of the underlying instrument does
not fall enough to offset the cost of purchasing the option, a put buyer
would lose the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns
or wants to buy. The portfolio would ordinarily realize a gain if, during
the option period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs.
Otherwise, the portfolio would realize either no gain or a loss on the
purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put
option) or buying (in the case of a call option) the underlying
instrument at the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to
purchase specified securities from the option holder at a specified price
if the option is exercised at any time before the expiration date. The
portfolio may terminate its position in an exchange-traded put option
before exercise by buying an option identical to the one it has written.
Similarly, it may cancel an over-the-counter option by entering into an
offsetting transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the
securities it would like to acquire.
The characteristics of writing call options are similar to those of
writing put options, except that call writers expect to profit if prices
remain the same or fall. The portfolio could try to hedge against a
decline in the value of securities it already owns by writing a call
option. If the price of that security falls as expected, the portfolio
would expect the option to expire and the premium it received to offset
the decline of the security's value. However, the portfolio must be
prepared to deliver the underlying instrument in return for the strike
price, which may deprive it of the opportunity to profit from an increase
in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio
can cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the
underlying security without additional consideration), index,
interest rate, foreign currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal
to the difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract.
. In the case of an index, the portfolio of securities that
corresponds to the index.
The portfolio can cover a put option by, at the time of selling the
option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater
exercise price.
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. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
portfolio's exposure to interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements can take many different forms and are known by a variety
of names.
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.
Swap agreements tend to shift the investment exposure of the portfolio
from one type of investment to another. For example, if the portfolio
agreed to exchange payments in dollars for payments in foreign currency,
the swap agreement would tend to decrease the portfolio's exposure to U.S.
interest rates and increase its exposure to foreign currency and interest
rates. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the investments of the portfolio and
its share price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence.
. Current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining
until expiration of the contract.
. A difference between the derivatives and securities markets,
including different levels of demand, how the instruments are
traded, the imposition of daily price fluctuation limits or trading
of an instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would
rise, but the price were to fall instead, the portfolio could be required
to purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but
are declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred
stocks normally have preference over common stock in the payment of
dividends and the liquidation of the company. However, in all other
resects, preferred stocks are subordinated to the liabilities of the
issuer. Unlike common stocks, preferred stocks are generally not entitled
to vote on corporate matters. Types of preferred stocks include
adjustable-rate preferred stock, fixed dividend preferred stock, perpetual
preferred stock, and sinking fund preferred stock. Generally,
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the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived
credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the
same corporation. Their market price tends to go up if the stock price
moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry
the right to receive dividends or exercise voting rights with respect to
the underlying securities, and they do not represent any rights in the
assets of the issuer. In addition, their value does not necessarily change
with the value of the underlying securities, and they cease to have value
if they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the
benefits of owning a company, the portfolio must accept the risks of
ownership. Unlike bondholders, who have preference to a company's earnings
and cash flow, preferred stockholders, followed by common stockholders in
order of priority, are entitled only to the residual amount after a
company meets its other obligations. For this reason, the value of a
company's stock will usually react more strongly to actual or perceived
changes in the company's financial condition or prospects than its debt
obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made
by its management or lower demand for the company's products or
services.
. Factors affecting an entire industry, such as increases in
production costs.
. Changes in financial market conditions that are relatively unrelated
to the company or its industry, such as changes in interest rates,
currency exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than
in a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization
falls with the range specified in the prospectus of the portfolio.
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and
financial resources, narrow product lines and frequent lack of management
depth. The securities of small and medium companies are often traded in
the over-the-counter market and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities
of small and medium capitalization companies are likely to be less liquid,
and subject to more abrupt or erratic market movements, than securities of
larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may
significantly influence other, related industries. For example, technology
companies may be strongly affected by worldwide scientific or
technological developments and their products and services may be subject
to governmental regulation or adversely affected by governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these
securities are located can be developed or emerging. People can invest in
foreign securities in a number of ways:
. They can invest directly in foreign securities denominated in a
foreign currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of
the risks associated with investing directly in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
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international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most
nations located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in
the securities of their companies. Certain emerging countries, however,
permit indirect foreign investment in the securities of companies listed
and traded on their stock exchanges through investment funds that they
have specifically authorized. The portfolio may invest in these investment
funds subject to the provisions of the 1940 Act. If a portfolio invests in
such investment funds, its shareholders will bear not only their
proportionate share of the expenses of the portfolio (including operating
expenses and the fees of the adviser), but also will bear indirectly bear
similar expenses of the underlying investment funds. In addition, these
investment funds may trade at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect a portfolio's
investments.
. The economies of foreign countries may differ from the economy of
the United States in such areas as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency,
budget deficits and national debt.
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly
influence the market prices of securities and payment of dividends.
. The economies of many foreign countries are dependnt on
international trade and their trading partners and they could be
severely affected if their trading partners were to enact protective
trade barriers and economic conditions.
. The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its
securities markets. These restrictions could limit ability of a
portfolio to invest a particular country or make it very expensive
for the portfolio to invest in that country. Some countries require
prior governmental approval, limit the types or amount of securities
or companies in which a foreigner can invest. Other countries may
restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there
are often no reports and ratings published about foreign companies
comparable to the ones written about United States companies. Foreign
companies are typically not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to
those
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applicable United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as
the markets in the United States. Foreign stocks markets tend to differ
from those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more
volatile, than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and
erratic price movements.
. Commissions on foreign stocks are generally higher and subject to
set minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are
often less developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays
and increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and
their exchange rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces.
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations
available through dealers or other market sources be firm or revised
on a timely basis.
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may
not reflect exchange rates for smaller odd-lot transactions (less
than $1 million) where rates may be less favorable.
. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while
the markets for the underlying currencies remain open, certain
markets may not always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and
interest income. Although in some countries the portfolio may recover a
portion of these taxes, the portion it cannot recover will reduce the
income the portfolio receives from its investments. The portfolio does not
expect such foreign withholding taxes to have a significant impact on
performance.
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Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile
than those in more developed markets, reflecting the greater uncertainties
of investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions
on foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed
countries.
. Have economies that are based on only a few industries, may be
highly vulnerable to changes in local or global trade conditions,
and may suffer from extreme and volatile debt burdens or inflation
rates.
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or
impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for
participating member countries over a period that began on January 1, 1999
and ends in July 2002. At the end of that period, use of the Euro will be
compulsory and countries in the EMU will no longer maintain separate
currencies in any form. Until then, however, each country and issuers
within each country are free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also
anticipates pricing, trading, settling and valuing investments whose
nominal values remain in their existing domestic currencies in Euros.
Accordingly, the portfolio expects the conversion to the Euro to impact
investments in countries that will adopt the Euro in all aspects of the
investment process, including trading, foreign exchange, payments,
settlements, cash accounts, custody and accounting. Some of the
uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other
financial institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on
outstanding financial contracts that refer to existing currencies
rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
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A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by 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.
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. 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.
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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).
II-21
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that
may have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit
if the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date
a security that it either contemporaneously owns or has the right to
acquire at no extra cost. A portfolio will incur transaction costs to
open, maintain and close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of
all securities sold short would exceed 25% of the value of the
portfolio net assets.
. The market value of the securities of any single issuer that have
been sold short by the portfolio would exceed the two percent (2%)
of the value of the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a)
the market value of the securities sold short at the time they were sold
short and (b) any cash or U.S. Government securities the portfolio is
required to deposit with the broker in connection
II-22
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited
with the broker is at least equal to the market value of the securities at
the time they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed
delivery" refers to securities transactions on the secondary market where
settlement occurs in the future. In each of these transactions, the
parties fix the payment obligation and the interest rate that they will
receive on the securities at the time the parties enter the commitment;
however, they do not pay money or deliver securities until a later date.
Typically, no income accrues on securities the portfolio has committed to
purchase before the securities are delivered, although the portfolio may
earn income on securities it has in a segregated account. The portfolio
will only enter into these types of transactions with the intention of
actually acquiring the securities, but may sell them before the settlement
date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield
at the time of purchase. When the portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, the portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time
of settlement, the market value of the security may be more or less than
the purchase price. The yield available in the market when the delivery
takes place also may be higher than those obtained in the transaction
itself. Because the portfolio does not pay for the security until the
delivery date, these risks are in addition to the risks associated with
its other investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily
so that the value of such assets is equal to the amount of its
commitments.
MANAGEMENT OF THE FUND
The governing board manages the business of the fund. The governing board
elects officers who 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
that are affiliated with the fund for their services as board members. UAM
or its affiliates or CGFSC 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, which is currently comprised of 50 portfolios.
Those people with an asterisk beside their name are "interested persons"
of the Fund as that term is defined in the 1940 Act.
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment
College Road -- RFD 3 Member Management Company, Inc. and
Meredith, NH 03253 Great Island Investment
1/26/29 Company, Inc.; President of
Bennett Management Company
from 1988 to 1993.
-------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World
10 Garden Street Member Wildlife Fund since January
Cambridge, MA 02138 1999. Formerly, Vice
8/14/51 President for Finance and
Administration and Treasurer
of Radcliffe College from
1991 to 1999.
-------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and
100 King Street West Member Chief Administrative Officer
P.O. Box 2440, LCD-1 of Philip Services Corp.;
Hamilton Ontario, Formerly, a Partner in the
Canada L8N-4J6 Philadelphia office of the
4/21/42 law firm Dechert Price &
Rhoads and a Director of
Hofler Corp.
-------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive
16 West Madison Member Officer of Broventure
Street Company, Inc.; Chairman of
Baltimore, MD 21201 the Board of Chektec
8/5/48 Corporation and Cyber
Scientific, Inc
-------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment 0 0
211 Congress Street Member Services, Inc. since March
Boston, MA 02110 1999 and Vice President UAM
2/24/53 Trust Company since January
1996; Principal of UAM Fund
Distributors, Inc. since
December 1995; formerly Vice
President of UAM Investment
Services, Inc. from January
1999 to 1996 and a Director
and Chief Operating Officer
of CS First Boston Investment
Management from 1993-1995.
-------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive 0 0
One International Member; Officer and a Director of
Place President United Asset Management
Boston, MA 02110 and Corporation; Director,
3/21/35 Chairman Partner or Trustee of each of
the Investment Companies of
the Eaton Vance Group of
Mutual Funds.
-------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief 0 0
One Financial Center Member Investment Officer of Dewey
Boston, MA 02111 Square Investors Corporation
7/1/43 since 1988; Director and
Chief Executive Officer of
H.T. Investors, Inc.,
formerly a subsidiary of
Dewey Square.
-------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and 0 0
One International President Chief Financial Officer of
Place United Asset Management
Boston, MA 02110 Corporation.
9/19/47
-------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and 0 0
211 Congress Street UAMFDI, formerly Vice
Boston, MA 02110 President of Operations,
7/4/51 Development and Control of
Fidelity Investments in 1995;
Treasurer of the Fidelity
Group of Mutual Funds from
1991 to 1995.
-------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General 0 0
211 Congress Street Counsel of UAMFSI and UAMFDI;
Boston, MA 02110 Associate Attorney of Ropes &
2/28/68 Gray (a law firm) from 1993
to 1995.
-------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; 0 0
211 Congress Street Treasurer formerly Manager of Fund
Boston, MA 02110 Administration and Compliance
9/18/63 of CGFSC from 1995 to 1996;
Senior Manager of Deloitte &
Touche LLP from 1985 to 1995,
-------------------------------------------------------------------------------------------------------------
Michael J. Leary Assistant Vice President of Chase 0 0
73 Tremont Street Treasurer Global Funds Services Company
Boston, MA 02108 since 1993. Manager of Audit
11/23/65 at Ernst & Young from 1988 to
1993.
-------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer of Chase 0 0
73 Tremont Street Secretary Global Funds Services Company
Boston, MA 02108 since 1996. Senior Public
4/12/69 Accountant with Price
Waterhouse LLP from 1991 to
1994.
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and
individual investment philosophy and approach. Each UAM Affiliated Firm
manages its own business independently on a day-to-day basis. Investment
strategies employed and securities selected by UAM Affiliated Firms are
separately chosen by each of them. Several UAM Affiliated Firms also act
as investment advisers to separate series or portfolios of the UAM Funds
complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each
agreement with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the
portfolios.
. Continuously reviews, supervises and administers the investment
program of the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and
duties under the Advisory Agreement, (2) reckless disregard by the adviser
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
II-25
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least
annually by a:
. Majority of those Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the
shareholders of the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-26
<PAGE>
. Charges and expenses of pricing and data services, independent
public accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund
accounting services to CGFSC, an affiliate of The Chase Manhattan Bank,
under a Mutual Funds Service Agreement dated October 26, 1998. CGFSC is
located at 73 Tremont Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and
DST Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas
City, Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of
UAMSSC is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does
the Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-27
<PAGE>
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
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
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 Fund changed its
name to "UAM Funds Trust." The Fund's principal executive
II-28
<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or
classes of shares of beneficial interest without shareholder approval. The
Board has authorized three classes of shares: Institutional Class,
Institutional Service Class, and Advisor Class. Not all of the portfolios
issue all of the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the
election of board members can elect 100% of the board 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 Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that
portfolio, or in the case of a class, belonging to that portfolio and
allocable to that class. The Fund will distribute is net assets to its
shareholders in proportion to the number of shares of that portfolio or
class thereof held by them and recorded on the books of the Fund. A
majority of the Board may authorize the liquidation of any portfolio or
class at any time.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional,
Institutional Service and Advisor. The three classes represent interests
in the same assets of the portfolio and, except as discussed below, are
identical in all respects.
. Institutional Service Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder
servicing and the distribution of such shares and have exclusive
voting rights with respect to matters relating to such distribution
expenditures. Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
II-29
<PAGE>
Income dividends and capital gains distributions are reinvested in
additional shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders
may change their dividend and distributions option by writing to the fund
at least three days before the record date for income dividend or capital
gain distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net
investment income 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, a portfolio
cannot predict the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a
separate "regulated investment company") for federal tax purposes. The
capital gains/losses of one portfolio will not be offset against the
capital gains/losses of another portfolio.
"Buying a Dividend"
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 just
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.
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.
II-30
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity
securities and listed securities not traded on the valuation date for
which market quotations are readily available are valued neither exceeding
the asked prices nor less than the bid prices. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents.
The converted value is based upon the bid price of the foreign currency
against U.S. dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a
pricing service when such prices are believed to reflect the fair market
value of such securities. Securities purchased with remaining maturities
of 60 days or less are valued at amortized cost when the governing board
determines that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price.
The fund must receive proper payment for the order by the time the
portfolio calculates its NAV on the following business day. Service Agents
are responsible to their customers and the Fund for timely transmission of
all subscription and redemption requests, investment information,
documentation and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales
of the portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "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.
II-31
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part
by a distribution in-kind of liquid securities held by the portfolio in
lieu of cash in conformity with applicable
II-32
<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount
during any 90-day period to the lesser of $250,000 or 1% of the net assets
of the Fund at the beginning of such period. Such commitment is
irrevocable without the prior approval of the SEC. Redemptions in excess
of the above limits may be paid in whole or in part, in investment
securities or in cash, as the Board may deem advisable; however, payment
will be made wholly in cash unless the governing board believes that
economic or market conditions exist which would make such a practice
detrimental to the best interests of the Fund. If redemptions are paid in
investment securities, such securities will be valued as set forth under
"Valuation of Shares." A redeeming shareholder would normally incur
brokerage expenses if these securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the
person who has authorized a redemption from your account and to protect
your account, the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing
agencies and savings associations. You can get a complete definition of
eligible guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be
authorized to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper
procedures within seven days after it received your request. However, the
fund will pay your redemption proceeds earlier as applicable law so
requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
II-33
<PAGE>
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings
and are not intended to indicate future performance. The 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
II-34
<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the
performance of a portfolio. The Fund or UAMFDI may include this
information in sales literature and advertising. Appendix B lists the
publications, indices and averages that the fund may be use. These types
of advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various
independent services that monitor the performance of investment companies,
data reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in
mind that
The composition of the investments in the reported indices and averages
may be different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may
be different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-35
<PAGE>
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, as applicable.
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 the 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, the 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. The portfolio intends to qualify as a "regulated investment
company" each year.
Dividends and interest received by the portfolio may give rise to
withholding and other taxes imposed by foreign countries. These taxes
would reduce the portfolio's dividends but are included in the taxable
income reported on your tax statement if the 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.
FINANCIAL STATEMENTS
The following documents are included in 1999 Annual Report of each
portfolio, other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-36
<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find
information on how the fund calculates this number under "Purchase,
Redemption and Pricing of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds
Inc. II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same meaning
in the SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description
of Securities and Ratings
II-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, on balance, as
CCC 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 To provide more detailed indications of preferred stock quality,
(+) or ratings from AA to CCC may be modified by the addition of a plus
minus 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment
on the obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poors' believes that such payments will be made during
such grace period. The D rating also will be used upon the filing of
a bankruptcy petition or the taking of a similar action if payments
on an obligation are jeopardized.
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+/ High credit quality. Protection factors are strong. Risk is modest
AA but may vary slightly from time to time because of economic
conditions.
A+/ Protection factors are average but adequate. However, risk factors
A/A- are more variable in periods of greater economic stress.
BBB+/ Below-average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
cycles.
BBB-
BB+/ Below investment grade but deemed likely to meet obligations when
BB/ due. Present or prospective financial protection factors fluctuate
BB- according to industry conditions. Overall quality may move up or
down frequently within this category.
B+/ Below investment grade and possessing risk that obligation will
B/B- 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.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
A-5
<PAGE>
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, High default risk. Default is a real possibility. Capacity for
CC,C 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, Default. Securities are not meeting current obligations and are
DD,D 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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
FPA Crescent Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectuses of the portfolios dated July
__, 1999. You may obtain a prospectus for a portfolio by contacting the UAM
Funds at the address listed above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Part I: Portfolio Summary............................................................... I-1
FPA Crescent Portfolio............................................................... I-2
What Investment Strategies may the Portfolio use?.................................. I-2
What Are the Investment Policies of the Portfolio?................................. I-2
Fundamental Policies............................................................ I-2
Non-Fundamental Policies........................................................ I-3
Who Is The Investment Adviser Of The Portfolio?.................................... I-4
What is the Investment Philosophy and Style of the Adviser?..................... I-4
Who Are Some Representative Institutional Clients Of The Adviser?............... I-4
How much does the Portfolio Pay for Administrative Services?....................... I-4
Who are the Principal Holders of the Securities of the Portfolio?.................. I-5
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?............. I-5
Average Annual Total Return..................................................... I-5
Expenses........................................................................... I-5
Part II: The UAM Funds in Detail........................................................ II-1
Description of Permitted Investments................................................. Ii-2
Debt Securities.................................................................... II-2
Types of Debt Securities........................................................ II-2
Terms to Understand............................................................. II-6
Factors Affecting the Value of Debt Securities.................................. II-7
Derivatives........................................................................ II-8
Types of Derivatives............................................................ II-8
Risks of Derivatives............................................................ II-13
Equity Securities.................................................................. II-15
Types of Equity Securities...................................................... II-15
Risks of Investing in Equity Securities......................................... II-16
Foreign Securities................................................................. II-17
Types of Foreign Securities..................................................... II-17
Risks of Foreign Securities..................................................... II-18
The Euro........................................................................ II-20
Investment Companies............................................................... II-20
Repurchase Agreements.............................................................. II-20
Restricted Securities.............................................................. II-21
Securities Lending................................................................. II-21
Short Sales........................................................................ II-21
Description of Short Sales...................................................... II-21
Short Sales Against the Box..................................................... II-22
Restrictions on Short Sales..................................................... II-22
When-Issued, Forward Commitment and Delayed Delivery Transactions.................. II-22
Management Of The Fund............................................................... Ii-23
Investment Advisory and Other Services............................................... Ii-25
Investment Adviser................................................................. II-25
Control Of Adviser.............................................................. II-25
Investment Advisory Agreement................................................... II-25
Continuing an Advisory Agreement................................................ II-25
Terminating an Advisory Agreement............................................... II-25
Distributor........................................................................ II-26
Administrative Services............................................................ II-26
Administrator................................................................... II-26
Sub-Administrator............................................................... II-27
Sub-Transfer Agent and Sub-Shareholder Servicing Agent.......................... II-27
Administrative Fees............................................................. II-27
Custodian.......................................................................... II-27
Independent Public Accountant...................................................... II-27
Brokerage Allocation and Other Practices............................................. Ii-27
Selection of Brokers............................................................... II-27
Simultaneous Transactions.......................................................... II-28
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Brokerage Commissions....................................................... II-28
Equity Securities........................................................ II-28
Debt Securities.......................................................... II-28
Capital Stock and Other Securities............................................ Ii-28
The Fund.................................................................... II-28
Description Of Shares And Voting Rights..................................... II-28
Description of Shares.................................................... II-28
Class Differences........................................................ II-29
Dividends and Capital Gains Distributions................................... II-29
Dividend and Distribution Options........................................ II-29
Taxes on Distributions................................................... II-29
"Buying a Dividend"...................................................... II-30
Purchase Redemption and Pricing of Shares..................................... Ii-30
Net Asset Value Per Share................................................... II-30
Calculating NAV.......................................................... II-30
How the Fund Values it Assets............................................ II-30
Purchase of Shares.......................................................... II-31
In-Kind Purchases........................................................ II-31
Redemption of Shares........................................................ II-31
By Mail.................................................................. II-32
By Telephone............................................................. II-32
Redemptions-In-Kind...................................................... II-32
Signature Guarantees..................................................... II-32
Other Redemption Information............................................. II-33
Exchange Privilege.......................................................... II-33
Transfer Of Shares.......................................................... II-33
Performance Calculations...................................................... Ii-33
Total Return................................................................ II-34
Yield....................................................................... II-34
Comparisons................................................................. II-35
Taxes......................................................................... Ii-35
Financial Statements.......................................................... Ii-36
Glossary......................................................................... II-1
Appendix A: Description of Securities and Ratings............................... II-1
Moody's Investors Service, Inc................................................ A-1
Preferred Stock Ratings..................................................... A-1
Debt Ratings - Taxable Debt & Deposits Globally............................. A-1
Short-Term Prime Rating System - Taxable Debt & Deposits Globally........... A-2
Standard & Poor's Ratings Services............................................ A-3
Preferred Stock Ratings..................................................... A-3
Long-Term Issue Credit Ratings.............................................. A-3
Short-Term Issue Credit Ratings............................................. A-4
Duff & Phelps Credit Rating Co................................................ A-5
Long-term Debt and Preferred Stock.......................................... A-5
Short-Term Debt............................................................. A-5
High Grade............................................................... A-5
Good Grade............................................................... A-6
Satisfactory Grade....................................................... A-6
Non-Investment Grade..................................................... A-6
Default.................................................................. A-6
Fitch IBCA Ratings............................................................ A-6
International Long-Term Credit Ratings...................................... A-6
Investment Grade......................................................... A-6
Speculative Grade........................................................ A-6
International Short-Term Credit Ratings.................................. A-7
Notes.................................................................... A-7
Appendix B - Comparisons......................................................... A-1
</TABLE>
ii
<PAGE>
Part I: Portfolio
Summary
FPA Crescent Portfolio
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below
in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments, see "What
Are the Investment Policies of the Portfolio?"
. Equity securities (50% to 70% of its total assets).
. Debt Securities (30% to 50%).
. Debt Securities-- Below-investment grade (up to 30% of its total
assets).
. Foreign securities (up to 20% of its total assets).
. Futures.
. Forward currency exchange contracts (for hedging purposes only).
. Options.
. Short sales.
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
I-3
<PAGE>
Make loans to others, except (i) through the purchase of debt securities in
accordance with its investment objective and policies, and (ii) to the
extent the entry into a repurchase agreement is deemed to be a loan.
(i) borrow money, except as stated in the Prospectuses and this SAI. Any
such borrowing will be made only if immediately thereafter there is an
asset coverage of at least 300% of all borrowings; (ii) mortgage,
pledge or hypothecate any of its assets except in connection with any
such borrowings.
Purchase securities on margin, participate on a joint or joint and several
basis in any securities trading account, or underwrite securities (does
not preclude the Portfolio from obtaining such short-term credit as may
be necessary for the clearance of purchases and sales of its portfolio
securities).
Purchase or sell commodities or commodity contracts (other than futures
transactions for the purposes and under the conditions described in the
prospectuses and in this SAI).
Invest more than 25% of the market value of its assets in the securities of
companies engaged in any one industry (does not apply to investment in
the securities of the U.S. Government, its agencies or
instrumentalities).
Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii) entering
into options, futures or repurchase transactions.
Purchase the securities of any issuer, if as a result more than 5% of the
total assets of the Portfolio would be invested in the securities of
that issuer, other than obligations of the U.S. Government, its
agencies or instrumentalities, provided that up to 25% of the value of
the Portfolio's assets may be invested without regard to this
limitation.
Purchase or sell real estate; however, the Portfolio may invest in debt
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein, including
real estate investment trusts.
With respect to 75% of its assets, own more than 5% of the securities of
any single issuer (other than investments issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities).
With respect to 75% of its assets, own more than 10% of the outstanding
voting securities of any one issuer.
The portfolio may not borrow except from banks for temporary or emergency
purposes and in connection with short sales of securities. In these
situations, the portfolio will limit borrowings to no more than 33 1/3% of
the portfolio's assets, and the portfolio may not purchase additional
securities when borrowings exceed 5% of its total assets.
These investment restrictions do not prohibit the portfolio from engaging
in short sales of securities as described in the Prospectuses in Part II of
this SAI under "Description of Permitted Investments."
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio
may change them without shareholder approval. The portfolio will not:
. Hold more than 10% of any class of securities of an issuer (taking all
common stock issues of an issuer as a single class, all preferred
stock issues as a single class, and all debt issues as a single
class).
. Hold more than 10% of the outstanding voting securities of an issuer.
. 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.
I-4
<PAGE>
. 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).
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
First Pacific Advisors, Inc. s the investment adviser of the portfolio. For
its services, the portfolio pays its adviser a fee equal to 0.75 its
average age daily net assets. Due to the effect of fee waivers by the
adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For more information concerning the adviser, see
"Investment Advisory and Other Services" in Part II of this SAI.
What is the Investment Philosophy and Style of the Adviser?
Equity Securities
The adviser uses a contrarian investment style, which often leads to
investing in "what other people do not wish to own." The adviser searches
for common stocks, preferred stocks, warrants and convertible securities
that reflect low price/earnings ratios (P/Es) and trade at discounts to
private market value. The adviser deems the following to be important in
its stock selection process: high return on capital; solid balance sheet;
meaningful cash flow; active share repurchase program; insider buying;
strong management, seeking to add shareholder value; and projected earnings
growth exceeding the stock market average. In the adviser's view, the stock
market prices securities efficiently in the long term, rewarding companies
which successfully grow their own earnings and penalizing those which do
not. The investment philosophy is based on the conviction that the market
valuation of securities is often inefficient in the short-term. The adviser
feels that hasty short-term decisions could cause a particular security,
industry group or the entire market to become underpriced or overpriced in
the short- term, thereby creating an excellent opportunity to either buy or
sell.
The adviser's intensive research process includes looking for ideas by
reviewing stock price or industry group under performance, insider
purchasers, management changes and corporate spin-offs. Fundamental
analysis is the foundation of the Adviser's investment approach.
Debt Securities
Through fixed income investments, the adviser seeks a reliable and
recurring stream of income for the portfolio, while preserving its capital.
The adviser attempts to identify the current interest rate trends and
invests funds accordingly. Usually, a defensive strategy is employed, with
investments made at different points along the yield curve in an attempt to
keep the average maturity of fixed income investments less than or equal to
ten years.
The adviser considers yield spread relationships and their underlying
factors such as credit quality, investor perception and liquidity on a
continuous basis to determine which sector offers the best investment
value. When combined with equity securities, the ownership of fixed income
securities not only can broaden the universe of opportunities, but also can
offer additional diversification and can help lower portfolio volatility.
Who Are Some Representative Institutional Clients Of The Adviser?
As of the date of this SAI, the adviser's representative institutional
clients included: General Electric Investment Corporation; Eastman Kodak
Company; Federated Department Stores, Inc.; Fox Inc.; Xerox Corporation;
Southern Farm Bureau Life Insurance Company; Commonwealth of Pennsylvania
Public School Employees Retirement System; and The Lannan Foundation.
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. The fund
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<PAGE>
does not know whether these clients approve or disapprove of the adviser or
the advisory services provided.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.06% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM
Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. For more information concerning the
performance of the portfolio, including the way it calculates its
performance figures, see "Performance Calculations" in Part II of this SAI.
Average Annual Total Return
<TABLE>
<CAPTION>
For the Periods Ended Shorter of 10 Years
3/31/99 1 Year 5 Years or Since Inception Inception Date
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Class
--------------------------------------------------------------------------------------------
Institutional Service Class
</TABLE>
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<PAGE>
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Investment
Advisory Fees Advisory Fees Administrator Sub-Administrator Brokerage
Paid Waived Fee Fee Commissions
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
--------------------------------------------------------------------------------------------
1998
--------------------------------------------------------------------------------------------
1997
</TABLE>
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<PAGE>
Part II: The UAM Funds in
Detail
<PAGE>
Description of Permitted Investments
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.
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.
II-2
<PAGE>
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 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.
II-3
<PAGE>
. 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
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
II-4
<PAGE>
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
. 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".
II-5
<PAGE>
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 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
II-6
<PAGE>
general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
The portfolio may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing
of mortgage and asset-backed prepayments caused by the variations in
interest rates may also shorten or lengthen the average maturity of the
portfolio. If left unattended, drifts in the average maturity of the
portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the
expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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<PAGE>
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 portfolio is not obligated
to dispose of securities whose issuers subsequently are in default or which
are downgraded below the above-stated ratings.
DERIVATIVES
- --------------------------------------------------------------------------------
Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. 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.
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<PAGE>
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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their customers,
as opposed to futures contracts which are traded in only on exchanges
regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to
a commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the
portfolio to assume the risk of fluctuations in the value of the currency
it purchases. Cross hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs.
Otherwise, the portfolio would realize either no gain or a loss on the
purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract.
. In the case of an index, the portfolio of securities that corresponds
to the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price.
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. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
portfolio's exposure to interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements can take many different forms and are known by a variety of
names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease
the overall volatility of the investments of the portfolio and its share
price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence.
. Current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an
instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other resects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
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the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived
credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits
of owning a company, the portfolio must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made
by its management or lower demand for the company's products or
services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated
to the company or its industry, such as changes in interest rates,
currency exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization
falls with the range specified in the prospectus of the portfolio.
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the
over-the-counter market and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities
of small and medium capitalization companies are likely to be less liquid,
and subject to more abrupt or erratic market movements, than securities of
larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a
foreign currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
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international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. The portfolio may invest in these investment funds
subject to the provisions of the 1940 Act. If a portfolio invests in such
investment funds, its shareholders will bear not only their proportionate
share of the expenses of the portfolio (including operating expenses and
the fees of the adviser), but also will bear indirectly bear similar
expenses of the underlying investment funds. In addition, these investment
funds may trade at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect a portfolio's
investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt.
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends.
. The economies of many foreign countries are dependnt on international
trade and their trading partners and they could be severely affected
if their trading partners were to enact protective trade barriers and
economic conditions.
. The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit ability of a portfolio to
invest a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may
restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
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applicable United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more
volatile, than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and
erratic price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays
and increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and
their exchange rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces.
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis.
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable.
. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while
the markets for the underlying currencies remain open, certain markets
may not always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
II-19
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions
on foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed
countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or
impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain separate currencies in any
form. Until then, however, each country and issuers within each country are
free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that will adopt the Euro in all aspects of the investment
process, including trading, foreign exchange, payments, settlements, cash
accounts, custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than
Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by 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.
II-20
<PAGE>
. 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
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolios normally use repurchase agreements to
earn income on assets that are not invested.
When 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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).
II-21
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit
if the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire
at no extra cost. A portfolio will incur transaction costs to open,
maintain and close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio
net assets.
. The market value of the securities of any single issuer that have been
sold short by the portfolio would exceed the two percent (2%) of the
value of the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
II-22
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited
with the broker is at least equal to the market value of the securities at
the time they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities the portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. The portfolio will only enter
into these types of transactions with the intention of actually acquiring
the securities, but may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, the portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery
date, these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Management Of The Fund
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with
the fund for their services as board members. UAM or its affiliates or
CGFSC 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, which is currently comprised of 50 portfolios. Those
people with an asterisk beside their name are "interested persons" of the
Fund as that term is defined in the 1940 Act.
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations from Fund as of Complex as of
Name, Address, DOB with Fund During the Past 5 years 4/30/99 12/31/99
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam
College Road -- RFD 3 Member Investment Management
Meredith, NH 03253 Company, Inc. and
1/26/29 Great Island
Investment Company,
Inc.; President of
Bennett Management
Company from 1988 to
1993.
-----------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of
10 Garden Street Member World Wildlife Fund
Cambridge, MA 02138 since January 1999.
8/14/51 Formerly, Vice
President for Finance
and Administration
and Treasurer of
Radcliffe College
from 1991 to 1999.
-----------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice
100 King Street West Member President and Chief
P.O. Box 2440, LCD-1 Administrative
Hamilton Ontario, Officer of Philip
Canada L8N-4J6 Services Corp.;
4/21/42 Formerly, a Partner
in the Philadelphia
office of the law
firm Dechert Price &
Rhoads and a Director
of Hofler Corp.
-----------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief
16 West Madison Member Executive Officer of
Street Broventure Company,
Baltimore, MD 21201 Inc.; Chairman of the
8/5/48 Board of Chektec
Corporation and Cyber
Scientific, Inc
-----------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM 0 0
211 Congress Street Member Investment Services,
Boston, MA 02110 Inc. since March 1999
2/24/53 and Vice President
UAM Trust Company
since January 1996;
Principal of UAM Fund
Distributors, Inc.
since December 1995;
formerly Vice
President of UAM
Investment Services,
Inc. from January
1999 to 1996 and a
Director and Chief
Operating Officer of
CS First Boston
Investment Management
from 1993-1995.
-----------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief 0 0
One International Member; Executive Officer and
Place President a Director of United
Boston, MA 02110 and Asset Management
3/21/35 Chairman Corporation;
Director, Partner or
Trustee of each of
the Investment
Companies of the
Eaton Vance Group of
Mutual Funds.
-----------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief 0 0
One Financial Center Member Investment Officer of
Boston, MA 02111 Dewey Square
7/1/43 Investors Corporation
since 1988; Director
and Chief Executive
Officer of H.T.
Investors, Inc.,
formerly a subsidiary
of Dewey Square.
-----------------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice 0 0
One International President President and Chief
Place Financial Officer of
Boston, MA 02110 United Asset
9/19/47 Management
Corporation.
-----------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI 0 0
211 Congress Street and UAMFDI, formerly
Boston, MA 02110 Vice President of
7/4/51 Operations,
Development and
Control of Fidelity
Investments in 1995;
Treasurer of the
Fidelity Group of
Mutual Funds from
1991 to 1995.
-----------------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and 0 0
211 Congress Street General Counsel of
Boston, MA 02110 UAMFSI and UAMFDI;
2/28/68 Associate Attorney of
Ropes & Gray (a law
firm) from 1993 to
1995.
-----------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of 0 0
211 Congress Street Treasurer UAMFSI; formerly
Boston, MA 02110 Manager of Fund
9/18/63 Administration and
Compliance of CGFSC
from 1995 to 1996;
Senior Manager of
Deloitte & Touche LLP
from 1985 to 1995,
-----------------------------------------------------------------------------------------------------------------------
Michael J. Leary Assistant Vice President of 0 0
73 Tremont Street Treasurer Chase Global Funds
Boston, MA 02108 Services Company
11/23/65 since 1993. Manager
of Audit at Ernst &
Young from 1988 to
1993.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations from Fund as of Complex as of
Name, Address, DOB with Fund During the Past 5 years 4/30/99 12/31/99
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer 0 0
73 Tremont Street Secretary of Chase Global Funds
Boston, MA 02108 Services Company
4/12/69 since 1996. Senior
Public Accountant
with Price Waterhouse
LLP from 1991 to 1994.
</TABLE>
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each
agreement with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the
portfolios.
. Continuously reviews, supervises and administers the investment
program of the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Advisory Agreement, (2) reckless disregard by the adviser 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
II-25
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-26
<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73
Tremont Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and
DST Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas
City, Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of
UAMSSC is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-27
<PAGE>
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
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
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 Fund changed its
name to "UAM Funds Trust." The Fund's principal executive
II-28
<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes
of shares of beneficial interest without shareholder approval. The Board
has authorized three classes of shares: Institutional Class, Institutional
Service Class, and Advisor Class. Not all of the portfolios issue all of
the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the
election of board members can elect 100% of the board 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 Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional,
Institutional Service and Advisor. The three classes represent interests in
the same assets of the portfolio and, except as discussed below, are
identical in all respects.
. Institutional Service Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights
with respect to matters relating to such distribution expenditures.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
II-29
<PAGE>
Income dividends and capital gains distributions are reinvested in
additional shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net
investment income 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, a portfolio
cannot predict the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a
separate "regulated investment company") for federal tax purposes. The
capital gains/losses of one portfolio will not be offset against the
capital gains/losses of another portfolio.
"Buying a Dividend"
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 just
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.
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.
II-30
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "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.
II-31
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable
II-32
<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in
cash, as the Board may deem advisable; however, payment will be made wholly
in cash unless the governing board believes that economic or market
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth under "Valuation of Shares." A
redeeming shareholder would normally incur brokerage expenses if these
securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will
pay your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
II-33
<PAGE>
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
Performance Calculations
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
II-34
<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the
performance of a portfolio. The Fund or UAMFDI may include this information
in sales literature and advertising. Appendix B lists the publications,
indices and averages that the fund may be use. These types of
advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various
independent services that monitor the performance of investment companies,
data reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in
mind that
The composition of the investments in the reported indices and averages may
be different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may
be different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-35
<PAGE>
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, as applicable.
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 the 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, the 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. The
portfolio intends to qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to
withholding and other taxes imposed by foreign countries. These taxes would
reduce the portfolio's dividends but are included in the taxable income
reported on your tax statement if the 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.
Financial Statements
The following documents are included in 1999 Annual Report of each
portfolio, other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-36
<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find
information on how the fund calculates this number under "Purchase,
Redemption and Pricing of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description
of Securities and Ratings
II-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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated D is in payment default. The
D rating category is used when payments on an obligation
are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors' believes
that such payments will be made during such grace period.
The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
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.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection
factors. Risk factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Hanson Equity Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus.
However, you should read it in conjunction with the prospectuses of the
portfolios dated July __, 1999. You may obtain a prospectus for a portfolio
by contacting the UAM Funds at the address listed above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Part I: Portfolio Summary.................................................... I-1
HANSON EQUITY PORTFOLIO................................................... I-2
What Investment Strategies May The Portfolio Use?....................... I-2
What Are The Investment Policies Of The Portfolio?...................... I-2
Fundamental Policies................................................. I-2
Non-Fundamental Policies............................................. I-3
Who Is The Investment Adviser Of The Portfolio?......................... I-3
How Much Does The Portfolio Pay For Administrative Services?............ I-3
Who Are The Principal Holders Of The Securities Of The Portfolio?....... I-4
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?.. I-4
Average Annual Total Return.......................................... I-4
Expenses................................................................ I-4
Part II: The UAM Funds in Detail............................................. II-1
DESCRIPTION OF PERMITTED INVESTMENTS...................................... II-2
Debt Securities......................................................... II-2
Types of Debt Securities............................................. II-2
Terms to Understand.................................................. II-6
Factors Affecting the Value of Debt Securities....................... II-7
Derivatives............................................................. II-8
Types of Derivatives................................................. II-8
Risks of Derivatives................................................. II-13
Equity Securities....................................................... II-15
Types of Equity Securities........................................... II-15
Risks of Investing in Equity Securities.............................. II-16
Foreign Securities...................................................... II-17
Types of Foreign Securities.......................................... II-17
Risks of Foreign Securities.......................................... II-18
The Euro............................................................. II-20
Investment Companies.................................................... II-20
Repurchase Agreements................................................... II-20
Restricted Securities................................................... II-21
Securities Lending...................................................... II-21
Short Sales............................................................. II-21
Description of Short Sales........................................... II-21
Short Sales Against the Box.......................................... II-22
Restrictions on Short Sales.......................................... II-22
When-Issued, Forward Commitment and Delayed Delivery Transactions....... II-22
MANAGEMENT OF THE FUND.................................................... II-23
INVESTMENT ADVISORY AND OTHER SERVICES.................................... II-25
Investment Adviser...................................................... II-25
Control Of Adviser................................................... II-25
Investment Advisory Agreement........................................ II-25
Continuing an Advisory Agreement..................................... II-25
Terminating an Advisory Agreement.................................... II-25
Distributor............................................................. II-26
Administrative Services................................................. II-26
Administrator........................................................ II-26
Sub-Administrator.................................................... II-27
Sub-Transfer Agent and Sub-Shareholder Servicing Agent............... II-27
Administrative Fees.................................................. II-27
Custodian............................................................... II-27
Independent Public Accountant........................................... II-27
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. II-27
Selection of Brokers.................................................... II-27
Simultaneous Transactions............................................... II-28
Brokerage Commissions................................................... II-28
Equity Securities.................................................... II-28
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Debt Securities...................................................... II-28
CAPITAL STOCK AND OTHER SECURITIES........................................ II-28
The Fund................................................................ II-28
Description Of Shares And Voting Rights................................. II-28
Description of Shares................................................ II-28
Class Differences.................................................... II-29
Dividends and Capital Gains Distributions............................... II-29
Dividend and Distribution Options.................................... II-29
Taxes on Distributions............................................... II-29
"Buying a Dividend".................................................. II-30
PURCHASE REDEMPTION AND PRICING OF SHARES................................. II-30
Net Asset Value Per Share............................................... II-30
Calculating NAV...................................................... II-30
How the Fund Values it Assets........................................ II-30
Purchase of Shares...................................................... II-31
In-Kind Purchases.................................................... II-31
Redemption of Shares.................................................... II-31
By Mail.............................................................. II-32
By Telephone......................................................... II-32
Redemptions-In-Kind.................................................. II-32
Signature Guarantees................................................. II-32
Other Redemption Information......................................... II-33
Exchange Privilege...................................................... II-33
Transfer Of Shares...................................................... II-33
PERFORMANCE CALCULATIONS.................................................. II-33
Total Return............................................................ II-34
Yield................................................................... II-34
Comparisons............................................................. II-35
TAXES..................................................................... II-35
FINANCIAL STATEMENTS...................................................... II-36
Glossary..................................................................... II-1
Appendix A: Description of Securities and Ratings........................... II-1
MOODY'S INVESTORS SERVICE, INC............................................ A-1
Preferred Stock Ratings................................................. A-1
Debt Ratings - Taxable Debt & Deposits Globally......................... A-1
Short-Term Prime Rating System - Taxable Debt & Deposits Globally....... A-2
STANDARD & POOR'S RATINGS SERVICES........................................ A-3
Preferred Stock Ratings................................................. A-3
Long-Term Issue Credit Ratings.......................................... A-3
Short-Term Issue Credit Ratings......................................... A-4
DUFF & PHELPS CREDIT RATING CO............................................ A-5
Long-Term Debt and Preferred Stock...................................... A-5
Short-Term Debt......................................................... A-5
High Grade........................................................... A-5
Good Grade........................................................... A-6
Satisfactory Grade................................................... A-6
Non-Investment Grade................................................. A-6
Default.............................................................. A-6
FITCH IBCA RATINGS........................................................ A-6
International Long-Term Credit Ratings.................................. A-6
Investment Grade..................................................... A-6
Speculative Grade.................................................... A-6
International Short-Term Credit Ratings.............................. A-7
Notes................................................................ A-7
Appendix B - Comparisons..................................................... A-1
</TABLE>
ii
<PAGE>
Part I: Portfolio
Summary
<PAGE>
HANSON EQUITY PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below
in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments in "What
Are the Investment Policies of the Portfolio?"
. Equity securities (at least 80% in companies with market
capitalizations over $1 billion at the time of purchase).
. American depositary receipts (up to 20% of its total assets).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the U.S. government or any if its agencies or
instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any one issuer.
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the U.S. government and its
agencies.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 33 1/3 % of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
I-2
<PAGE>
. 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 purchasing debt securities in accordance with
its investment objectives, (ii) entering into repurchase agreements or
(iii) by lending its portfolio securities to banks, brokers, dealers
and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or
interpretations of the SEC thereunder.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into repurchase transactions.
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).
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Hanson Investment Management Company is the investment adviser of the
portfolio. For its services, the portfolio pays its adviser a fee equal to
0.70 its average age daily net assets. Due to the effect of fee waivers by
the adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For more information concerning the adviser, see
"Investment Advisory and Other Services" in Part II of this SAI.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM
Funds.
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<PAGE>
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. For more information concerning the
performance of the portfolio, including the way it calculates its
performance figures, see "Performance Calculations" in Part II of this SAI.
<TABLE>
<CAPTION>
Average Annual Total Return
For the Periods Shorter of 10 Years or
Ended 4/30/99 1 Year 5 Years Since Inception Inception Date
======================================================================================================
<S> <C> <C> <C> <C>
</TABLE>
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Investment
Advisory Fees Advisory Fees Administrator Sub-Administrator Brokerage
Paid Waived Fee Fee Commissions
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
----------------------------------------------------------------------------------------------------
1998
----------------------------------------------------------------------------------------------------
1997
</TABLE>
I-4
<PAGE>
Part II: The UAM Funds in
Detail
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
II-2
<PAGE>
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 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.
II-3
<PAGE>
. 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
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
II-4
<PAGE>
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
. 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".
II-5
<PAGE>
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 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
II-6
<PAGE>
general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total
return of a debt instrument, therefore, will be determined not only by how
much interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will
go down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities,
which may cause your share price to fall. Lower rates motivate people to
pay off mortgage-backed and asset-backed securities earlier than expected.
The portfolio may then have to reinvest the proceeds from such prepayments
at lower interest rates, which can reduce its yield. The unexpected timing
of mortgage and asset-backed prepayments caused by the variations in
interest rates may also shorten or lengthen the average maturity of the
portfolio. If left unattended, drifts in the average maturity of the
portfolio can have the unintended effect of increasing or reducing the
effective duration of the portfolio, which may adversely affect the
expected performance of the portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
II-7
<PAGE>
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 portfolio is not obligated
to dispose of securities whose issuers subsequently are in default or which
are downgraded below the above-stated ratings.
DERIVATIVES
- --------------------------------------------------------------------------------
Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. 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.
II-8
<PAGE>
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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or
sell a specific amount of currency at a future date or date range at a
specific price. In the case of a cancelable forward contract, the holder
has the unilateral right to cancel the contract at maturity by paying a
specified fee. Forward foreign currency exchange contracts differ from
foreign currency futures contracts in certain respects. Unlike futures
contracts, forward contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between
currency traders (usually large commercial banks) and their customers,
as opposed to futures contracts which are traded in only on exchanges
regulated by the CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to
a commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made
or received. Entering into a forward contract for the purchase or sale of
the amount of foreign currency involved in an underlying security
transaction for a fixed amount of U.S. dollars "locks in" the U.S. dollar
price of the security. The portfolio may also use forward contracts to
purchase or sell a foreign currency when it anticipates purchasing or
selling securities denominated in foreign currency, even if it has not yet
selected the specific investments.
The portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a
hedge, sometimes referred to as a "position hedge," would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The portfolio could
also hedge the position by selling another currency expected to perform
similarly to the currency in which the portfolio's investment is
denominated. This type of hedge, sometimes referred to as a "proxy hedge,"
could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend
to minimize the risk of loss due to a decline in the value of the hedged
currency and to limit any potential gain that might result from the
increase in value of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or
from one foreign currency to another foreign currency. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased. Cross-hedges protect against losses
resulting from a decline in the hedged currency, but will cause the
portfolio to assume the risk of fluctuations in the value of the currency
it purchases. Cross hedging transactions also involve the risk of imperfect
correlation between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency
on the spot market if the market value of a security it is hedging is less
than the amount of foreign currency it is obligated to deliver. Conversely,
the portfolio may have to sell on the spot market some of the foreign
currency it received upon the sale of a security if the market value of
such security exceeds the amount of foreign currency it is obligated to
deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer
two kinds of rights: a "call" (the right to buy the security) or a "put"
(the right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no
such intermediary and are subject to the risk that the counter-party will
not fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for
this right, the portfolio pays the current market price for the option
(known as the "option premium"). The portfolio may purchase put options to
offset or hedge against a decline in the market value of its securities
("protective puts") or to benefit from a decline in the price of securities
that it does not own. The portfolio would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreased
below the exercise price sufficiently to cover the premium and transaction
costs. However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer would lose
the premium and related transaction costs.
Call options are similar to put options, except that the portfolio obtains
the right to purchase, rather than sell, the underlying instrument at the
option's strike price. The portfolio would normally purchase call options
in anticipation of an increase in the market value of securities it owns or
wants to buy. The portfolio would ordinarily realize a gain if, during the
option period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs.
Otherwise, the portfolio would realize either no gain or a loss on the
purchase of the call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option)
or buying (in the case of a call option) the underlying instrument at
the strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if
the option is exercised at any time before the expiration date. Similarly,
when the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the
option is exercised at any time before the expiration date. The portfolio
may terminate its position in an exchange-traded put option before exercise
by buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower
price. If security prices fall, the portfolio may lose an amount of money
equal to the difference between the value of the security and the premium
it received. Writing covered put options may deprive the portfolio of the
opportunity to profit from a decrease in the market price of the securities
it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the
value of securities it already owns by writing a call option. If the price
of that security falls as expected, the portfolio would expect the option
to expire and the premium it received to offset the decline of the
security's value. However, the portfolio must be prepared to deliver the
underlying instrument in return for the strike price, which may deprive it
of the opportunity to profit from an increase in the market price of the
securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal to
the difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract.
. In the case of an index, the portfolio of securities that corresponds
to the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price.
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. Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
portfolio's exposure to interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements can take many different forms and are known by a variety of
names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease
the overall volatility of the investments of the portfolio and its share
price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying
instruments, even if the characteristics of the underlying instruments are
very similar to the derivative. Listed below are some of the factors that
may cause such a divergence.
. Current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the
imposition of daily price fluctuation limits or trading of an
instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends,
the portfolio may lose money by investing in derivatives. For example, if
the portfolio were to write a call option based on its adviser's
expectation that the price of the underlying security would fall, but the
price were to rise instead, the portfolio could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if the portfolio were to write a put option based on the
adviser's expectation that the price of the underlying security would rise,
but the price were to fall instead, the portfolio could be required to
purchase the security upon exercise at a price higher than the current
market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of
factors, including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and
the liquidation of the company. However, in all other resects, preferred
stocks are subordinated to the liabilities of the issuer. Unlike common
stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock,
fixed dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
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the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived
credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower
rate of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is
more volatile during times of steady interest rates than other types of
debt securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that
give the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is
issued. Corporations often issue warrants to make the accompanying debt
security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with
the value of the underlying securities, and they cease to have value if
they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized
from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits
of owning a company, the portfolio must accept the risks of ownership.
Unlike bondholders, who have preference to a company's earnings and cash
flow, preferred stockholders, followed by common stockholders in order of
priority, are entitled only to the residual amount after a company meets
its other obligations. For this reason, the value of a company's stock will
usually react more strongly to actual or perceived changes in the company's
financial condition or prospects than its debt obligations. Stockholders of
a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of
rising and falling stock prices. The value of a company's stock may fall
because of:
. Factors that directly relate to that company, such as decisions made
by its management or lower demand for the company's products or
services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated
to the company or its industry, such as changes in interest rates,
currency exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the
issuer will cause greater changes in the value of a preferred stock than in
a more senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization
falls with the range specified in the prospectus of the portfolio.
Investors in small and medium-sized companies typically take on greater
risk and price volatility than they would by investing in larger, more
established companies. This increased risk may be due to the greater
business risks of their small or medium size, limited markets and financial
resources, narrow product lines and frequent lack of management depth. The
securities of small and medium companies are often traded in the
over-the-counter market and might not be traded in volumes typical of
securities traded on a national securities exchange. Thus, the securities
of small and medium capitalization companies are likely to be less liquid,
and subject to more abrupt or erratic market movements, than securities of
larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Technology companies operate in
various industries. Since these industries frequently share common
characteristics, an event or issue affecting one industry may significantly
influence other, related industries. For example, technology companies may
be strongly affected by worldwide scientific or technological developments
and their products and services may be subject to governmental regulation
or adversely affected by governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in
markets outside of the United States. The markets in which these securities
are located can be developed or emerging. People can invest in foreign
securities in a number of ways:
. They can invest directly in foreign securities denominated in a
foreign currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership
of shares of a foreign issuer. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the
issuer's home country holds the underlying shares in trust. The depository
bank may not have physical custody of the underlying securities at all
times and may charge fees for various services, including forwarding
dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national
markets and currencies. However, ADRs continue to be subject to many of the
risks associated with investing directly in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country.
Typically, emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
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international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock
markets. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and
traded on their stock exchanges through investment funds that they have
specifically authorized. The portfolio may invest in these investment funds
subject to the provisions of the 1940 Act. If a portfolio invests in such
investment funds, its shareholders will bear not only their proportionate
share of the expenses of the portfolio (including operating expenses and
the fees of the adviser), but also will bear indirectly bear similar
expenses of the underlying investment funds. In addition, these investment
funds may trade at a premium over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S.
entities with substantial foreign operations may involve significant risks
in addition to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military
action or unrest, or adverse diplomatic developments may affect the value
of foreign investments. Listed below are some of the more important
political and economic factors that could negatively affect a portfolio's
investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt.
. Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends.
. The economies of many foreign countries are dependnt on international
trade and their trading partners and they could be severely affected
if their trading partners were to enact protective trade barriers and
economic conditions.
. The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit ability of a portfolio to
invest a particular country or make it very expensive for the
portfolio to invest in that country. Some countries require prior
governmental approval, limit the types or amount of securities or
companies in which a foreigner can invest. Other countries may
restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign
companies than companies based in the United States. For example, there are
often no reports and ratings published about foreign companies comparable
to the ones written about United States companies. Foreign companies are
typically not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
II-18
<PAGE>
applicable United States companies. The lack of comparable information
makes investment decisions concerning foreign countries more difficult and
less reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best
available market for foreign securities. Foreign stock markets, while
growing in volume and sophistication, are generally not as developed as the
markets in the United States. Foreign stocks markets tend to differ from
those in the United States in a number of ways:
. They are generally not as developed or efficient as, and more
volatile, than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and
erratic price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often
less developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays
and increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the
values of various currencies, including United States dollars, and
their exchange rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces.
. There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis.
. Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable.
. The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while
the markets for the underlying currencies remain open, certain markets
may not always reflect significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
II-19
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular,
countries with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions
on foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed
countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or
impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"),
the Euro, is scheduled to replace the national currencies for participating
member countries over a period that began on January 1, 1999 and ends in
July 2002. At the end of that period, use of the Euro will be compulsory
and countries in the EMU will no longer maintain separate currencies in any
form. Until then, however, each country and issuers within each country are
free to choose whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of
the Euro at fixed rates according to practices prescribed by the European
Monetary Institute and the Euro became available as a book-entry currency.
On or about that date, member states began conducting financial market
transactions in Euros and redenominating many investments, currency
balances and transfer mechanisms into Euros. The portfolio also anticipates
pricing, trading, settling and valuing investments whose nominal values
remain in their existing domestic currencies in Euros. Accordingly, the
portfolio expects the conversion to the Euro to impact investments in
countries that will adopt the Euro in all aspects of the investment
process, including trading, foreign exchange, payments, settlements, cash
accounts, custody and accounting. Some of the uncertainties surrounding the
conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than
Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new
currency be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to
the fees currently paid by 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.
II-20
<PAGE>
. 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
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually
not more than 7 days). The portfolios normally use repurchase agreements to
earn income on assets that are not invested.
When 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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).
II-21
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not
own. To sell a security short an investor must borrow the security from
someone else to deliver to the buyer. The investor then replaces the
security it borrowed by purchasing it at the market price at or before the
time of replacement. Until it replaces the security, the investor repays
the person that lent it the security for any interest or dividends that may
have accrued during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit
if the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to
pay in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed
out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire
at no extra cost. A portfolio will incur transaction costs to open,
maintain and close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio
net assets.
. The market value of the securities of any single issuer that have been
sold short by the portfolio would exceed the two percent (2%) of the
value of the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any
class of the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
II-22
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited
with the broker is at least equal to the market value of the securities at
the time they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities the portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. The portfolio will only enter
into these types of transactions with the intention of actually acquiring
the securities, but may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued,
delayed-delivery and forward delivery transactions, it relies on the other
party to consummate the sale. If the other party fails to complete the
sale, the portfolio may miss the opportunity to obtain the security at a
favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery
date, these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
MANAGEMENT OF THE FUND
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with
the fund for their services as board members. UAM or its affiliates or
CGFSC 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, which is currently comprised of 50 portfolios. Those
people with an asterisk beside their name are "interested persons" of the
Fund as that term is defined in the 1940 Act.
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment
College Road -- RFD 3 Member Management Company, Inc. and
Meredith, NH 03253 Great Island Investment
1/26/29 Company, Inc.; President of
Bennett Management Company
from 1988 to 1993.
-------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World
10 Garden Street Member Wildlife Fund since January
Cambridge, MA 02138 1999. Formerly, Vice
8/14/51 President for Finance and
Administration and Treasurer
of Radcliffe College from
1991 to 1999.
-------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and
100 King Street West Member Chief Administrative Officer
P.O. Box 2440, LCD-1 of Philip Services Corp.;
Hamilton Ontario, Formerly, a Partner in the
Canada L8N-4J6 Philadelphia office of the
4/21/42 law firm Dechert Price &
Rhoads and a Director of
Hofler Corp.
-------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive
16 West Madison Street Member Officer of Broventure
Baltimore, MD 21201 Company, Inc.; Chairman of
8/5/48 the Board of Chektec
Corporation and Cyber
Scientific, Inc
-------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment 0 0
211 Congress Street Member Services, Inc. since March
Boston, MA 02110 1999 and Vice President UAM
2/24/53 Trust Company since January
1996; Principal of UAM Fund
Distributors, Inc. since
December 1995; formerly Vice
President of UAM Investment
Services, Inc. from January
1999 to 1996 and a Director
and Chief Operating Officer
of CS First Boston Investment
Management from 1993-1995.
-------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive 0 0
One International Place Member; Officer and a Director of
Boston, MA 02110 President United Asset Management
3/21/35 and Corporation; Director,
Chairman Partner or Trustee of each of
the Investment Companies of
the Eaton Vance Group of
Mutual Funds.
-------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief 0 0
One Financial Center Member Investment Officer of Dewey
Boston, MA 02111 Square Investors Corporation
7/1/43 since 1988; Director and
Chief Executive Officer of
H.T. Investors, Inc.,
formerly a subsidiary of
Dewey Square.
-------------------------------------------------------------------------------------------------------------
William H. Park Vice Executive Vice President and 0 0
One International Place President Chief Financial Officer of
Boston, MA 02110 United Asset Management
9/19/47 Corporation.
-------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and 0 0
211 Congress Street UAMFDI, formerly Vice
Boston, MA 02110 President of Operations,
7/4/51 Development and Control of
Fidelity Investments in 1995;
Treasurer of the Fidelity
Group of Mutual Funds from
1991 to 1995.
-------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General 0 0
211 Congress Street Counsel of UAMFSI and UAMFDI;
Boston, MA 02110 Associate Attorney of Ropes &
2/28/68 Gray (a law firm) from 1993
to 1995.
-------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; 0 0
211 Congress Street Treasurer formerly Manager of Fund
Boston, MA 02110 Administration and Compliance
9/18/63 of CGFSC from 1995 to 1996;
Senior Manager of Deloitte &
Touche LLP from 1985 to 1995,
-------------------------------------------------------------------------------------------------------------
Michael J. Leary Assistant Vice President of Chase 0 0
73 Tremont Street Treasurer Global Funds Services Company
Boston, MA 02108 since 1993. Manager of Audit
11/23/65 at Ernst & Young from 1988 to
1993.
-------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as Complex as of
Name, Address, DOB with Fund years of 4/30/99 12/31/99
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer of Chase 0 0
73 Tremont Street Secretary Global Funds Services Company
Boston, MA 02108 since 1996. Senior Public
4/12/69 Accountant with Price
Waterhouse LLP from 1991 to
1994.
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each
agreement with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the
portfolios.
. Continuously reviews, supervises and administers the investment
program of the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Advisory Agreement, (2) reckless disregard by the adviser 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
II-25
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-26
<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73
Tremont Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and
DST Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas
City, Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of
UAMSSC is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-27
<PAGE>
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
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
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 Fund changed its
name to "UAM Funds Trust." The Fund's principal executive
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<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes
of shares of beneficial interest without shareholder approval. The Board
has authorized three classes of shares: Institutional Class, Institutional
Service Class, and Advisor Class. Not all of the portfolios issue all of
the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the
election of board members can elect 100% of the board 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 Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio,
or in the case of a class, belonging to that portfolio and allocable to
that class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held
by them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940
Act or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional,
Institutional Service and Advisor. The three classes represent interests in
the same assets of the portfolio and, except as discussed below, are
identical in all respects.
. Institutional Service Shares bear certain expenses related to
shareholder servicing and the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing
and the distribution of such shares and have exclusive voting rights
with respect to matters relating to such distribution expenditures.
Advisor Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital
gains:
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<PAGE>
Income dividends and capital gains distributions are reinvested in
additional shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio
at NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at
least three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an
income dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net
investment income 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, a portfolio
cannot predict the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a
separate "regulated investment company") for federal tax purposes. The
capital gains/losses of one portfolio will not be offset against the
capital gains/losses of another portfolio.
"Buying a Dividend"
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 just
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.
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.
II-30
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market
quotations are readily available are valued at the last quoted sale price
of the day. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted equity securities
and listed securities not traded on the valuation date for which market
quotations are readily available are valued neither exceeding the asked
prices nor less than the bid prices. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents. The converted
value is based upon the bid price of the foreign currency against U.S.
dollars quoted by any major bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most
representative market, which will ordinarily be the over-the-counter
market. Debt securities may be valued based on prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities. Securities purchased with remaining maturities of 60 days
or less are valued at amortized cost when the governing board determines
that amortized cost reflects fair value.
Other Assets
The value of other assets and securities for which no quotations are
readily available (including restricted securities) is determined in good
faith at fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal
places) shares of a portfolio. The fund will not issue certificates for
fractional shares and will only issue certificates for whole shares upon
the written request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent
investment for certain fiduciary accounts, such as employee benefit plans
or under circumstances, where certain economies can be achieved in sales of
the portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of
the portfolio with securities, instead of cash. If the fund allows a
shareholder to make an in-kind purchase, it will value such securities
according to the policies described under "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.
II-31
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by
a distribution in-kind of liquid securities held by the portfolio in lieu
of cash in conformity with applicable
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<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable
without the prior approval of the SEC. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in
cash, as the Board may deem advisable; however, payment will be made wholly
in cash unless the governing board believes that economic or market
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth under "Valuation of Shares." A
redeeming shareholder would normally incur brokerage expenses if these
securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should
specify the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your
account, the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. You can get a complete definition of eligible
guarantor institutions by calling 1-877-826-5465. Broker-dealers
guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will
pay your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that
are qualified for sale in the shareholder's state of residence. Exchanges
are based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do
not charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for
the authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
II-33
<PAGE>
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by
making a written request to the Fund. Your request should clearly identify
the account and number of shares you wish to transfer. All registered
owners should sign the request and all stock certificates, if any, which
are subject to the transfer. The signature on the letter of request, the
stock certificate or any stock power must be guaranteed in the same manner
as described under "Signature Guarantees." As in the case of redemptions,
the written request must be received in good order before any transfer can
be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
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<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the
performance of a portfolio. The Fund or UAMFDI may include this information
in sales literature and advertising. Appendix B lists the publications,
indices and averages that the fund may be use. These types of
advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various
independent services that monitor the performance of investment companies,
data reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in
mind that
The composition of the investments in the reported indices and averages may
be different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may
be different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-35
<PAGE>
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, as applicable.
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 the 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, the 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. The
portfolio intends to qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to
withholding and other taxes imposed by foreign countries. These taxes would
reduce the portfolio's dividends but are included in the taxable income
reported on your tax statement if the 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.
FINANCIAL STATEMENTS
The following documents are included in 1999 Annual Report of each
portfolio, other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into
this SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-36
<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find
information on how the fund calculates this number under "Purchase,
Redemption and Pricing of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The
Big Board," the NYSE is located on Wall Street and is the largest exchange
in the United States.
Portfolio refers to a single series of the Fund, while portfolios refer to
all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the United
States. In particular, the SEC administers the 1933 ACT, the 1940 ACT and
the 1934 ACT.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc.
II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's
sub-shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description
of Securities and Ratings
II-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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D A short-term obligation rated D is in payment default. The
D rating category is used when payments on an obligation
are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors' believes
that such payments will be made during such grace period.
The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
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+/BB Below-average protection factors but still considered
B sufficient for prudent investment. Considerable variability
in risk during economic cycles.
BBB-
BB+/BB/B Below investment grade but deemed likely to meet
B- 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.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection
factors. Risk factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Jacobs International Octagon Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectuses of the portfolios dated July
__, 1999. You may obtain a prospectus for a portfolio by contacting the UAM
Funds at the address listed above.
<PAGE>
Table Of Contents
<TABLE>
<S> <C>
Part I: Portfolio Summary...........................................................................
Jacobs International Octagon Portfolio.............................................................
What Investment Strategies May The Portfolio Use?.................................................
What Are The Investment Policies Of The Portfolio?................................................
Fundamental Policies............................................................................
Non-Fundamental Policies........................................................................
Who Is The Investment Adviser Of The Portfolio?...................................................
How Much Does The Portfolio Pay For Administrative Services?......................................
Who Are The Principal Holders Of The Securities Of The Portfolio?.................................
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?............................
Average Annual Total Return.....................................................................
Expenses..........................................................................................
Part II: The UAM Funds in Detail....................................................................
Description of Permitted Investments...............................................................
Debt Securities...................................................................................
Types of Debt Securities........................................................................
Terms to Understand.............................................................................
Factors Affecting the Value of Debt Securities..................................................
Derivatives.......................................................................................
Types of Derivatives............................................................................
Risks of Derivatives............................................................................
Equity Securities.................................................................................
Types of Equity Securities......................................................................
Risks of Investing in Equity Securities.........................................................
Foreign Securities................................................................................
Types of Foreign Securities.....................................................................
Risks of Foreign Securities.....................................................................
The Euro........................................................................................
Investment Companies..............................................................................
Repurchase Agreements.............................................................................
Restricted Securities.............................................................................
Securities Lending................................................................................
Short Sales.......................................................................................
Description of Short Sales......................................................................
Short Sales Against the Box.....................................................................
Restrictions on Short Sales.....................................................................
When-Issued, Forward Commitment and Delayed Delivery Transactions.................................
Management Of The Fund.............................................................................
Investment Advisory and Other Services.............................................................
Investment Adviser................................................................................
Control Of Adviser..............................................................................
Investment Advisory Agreement...................................................................
Continuing an Advisory Agreement................................................................
Terminating an Advisory Agreement...............................................................
Distributor.......................................................................................
Administrative Services...........................................................................
Administrator...................................................................................
Sub-Administrator...............................................................................
Sub-Transfer Agent and Sub-Shareholder Servicing Agent..........................................
Administrative Fees.............................................................................
Custodian.........................................................................................
Independent Public Accountant.....................................................................
Brokerage Allocation and Other Practices...........................................................
Selection of Brokers..............................................................................
Simultaneous Transactions.........................................................................
Brokerage Commissions.............................................................................
Equity Securities...............................................................................
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Debt Securities.................................................................................
Capital Stock and Other Securities.................................................................
The Fund..........................................................................................
Description Of Shares And Voting Rights...........................................................
Description of Shares...........................................................................
Class Differences...............................................................................
Dividends and Capital Gains Distributions.........................................................
Dividend and Distribution Options...............................................................
Taxes on Distributions..........................................................................
"Buying a Dividend".............................................................................
Purchase Redemption and Pricing of Shares..........................................................
Net Asset Value Per Share.........................................................................
Calculating NAV.................................................................................
How the Fund Values it Assets...................................................................
Purchase of Shares................................................................................
In-Kind Purchases...............................................................................
Redemption of Shares..............................................................................
By Mail.........................................................................................
By Telephone....................................................................................
Redemptions-In-Kind.............................................................................
Signature Guarantees............................................................................
Other Redemption Information....................................................................
Exchange Privilege................................................................................
Transfer Of Shares................................................................................
Performance Calculations...........................................................................
Total Return......................................................................................
Yield.............................................................................................
Comparisons.......................................................................................
Taxes..............................................................................................
Financial Statements...............................................................................
Glossary............................................................................................
Appendix A: Description of Securities and Ratings..................................................
Moody's Investors Service, Inc.....................................................................
Preferred Stock Ratings...........................................................................
Debt Ratings - Taxable Debt & Deposits Globally...................................................
Short-Term Prime Rating System - Taxable Debt & Deposits Globally.................................
Standard & Poor's Ratings Services.................................................................
Preferred Stock Ratings...........................................................................
Long-Term Issue Credit Ratings....................................................................
Short-Term Issue Credit Ratings...................................................................
Duff & Phelps Credit Rating Co.....................................................................
Long-Term Debt and Preferred Stock................................................................
Short-Term Debt...................................................................................
High Grade......................................................................................
Good Grade......................................................................................
Satisfactory Grade..............................................................................
Non-Investment Grade............................................................................
Default.........................................................................................
Fitch IBCA Ratings.................................................................................
International Long-Term Credit Ratings............................................................
Investment Grade................................................................................
Speculative Grade...............................................................................
International Short-Term Credit Ratings.........................................................
Notes...........................................................................................
Appendix B - Comparisons............................................................................
</TABLE>
ii
<PAGE>
Part I: Portfolio
Summary
<PAGE>
JACOBS INTERNATIONAL OCTAGON PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below in
seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments in "What Are
the Investment Policies of the Portfolio?"
. Equity securities (at least 85% of its total assets).
. Equity securities of companies with market capitalizations of less than
$1.5 Billion at the time of purchase (between 20% and 40% of its total
assets).
. Foreign Securities (at least 85% of its total assets).
. Securities of issuers located in emerging markets (10% to 40% of its total
assets).
. Foreign currency exchange contracts (for hedging purposes only).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the of the
U.S. government or any if its agencies or instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the u.s. government, and its agencies when a portfolio
adopts a temporary defensive position.
I-2
<PAGE>
. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 331/3% of the
portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. Purchase or sell 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 purchasing debt securities in accordance with its
investment objectives and (ii) by lending its portfolio securities in
banks, brokers, dealers and other financial institutions so long as such
loans are not inconsistent with the 1940 Act or the rules and regulations
or interpretations of the SEC thereunder.
. Underwrite the securities of other issuers.
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio may
change them without shareholder approval. The portfolio will not:
. Invest in futures and/or options on futures unless not more than 5% of its
assets are required as deposit to secure obligations under such futures
and/or options on futures contracts. The portfolio may exclude from this
calculation, options that are in-the-money at the time of purchase.
. Invest more than 20% of its assets in futures and/or options on futures.
. 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.
. Purchase on margin or sell short except as specified herein.
. 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).
. Purchase additional securities when its borrowings exceed 5% of its total
assets.
. Pledge, mortgage or hypothecate any of its assets to an extent greater than
331/3 of its total assets at fair market value.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i) making
any permitted borrowings, mortgages or pledges, or (ii) entering into
repurchase transactions.
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Jacobs Asset Management is the investment adviser of the portfolio. For its
services, the portfolio pays its adviser a fee equal to 1.00% of its average
daily net assets. Due to the effect of fee waivers by the adviser, the actual
percentage of average net assets that the portfolio pays in any given year may
be different from the rate set forth in its contract with the adviser. For
more information concerning the adviser, see "Investment Advisory and Other
Services" in Part II of this SAI.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
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In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
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<PAGE>
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record or
beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned
<S> <C>
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. For more information concerning the performance
of the portfolio, including the way it calculates its performance figures, see
"Performance Calculations" in Part II of this SAI.
Average Annual Total Return
<TABLE>
<CAPTION>
For the Periods Ended Shorter of 10 Years or
4/30/99 1 Year 5 Years Since Inception Inception Date
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Investment
Advisory Fees Advisory Fees Brokerage
Paid Waived Administrator Fee Sub-Administrator Fee Commissions
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
-------------------------------------------------------------------------------------------------------
1998
-------------------------------------------------------------------------------------------------------
1997
</TABLE>
I-4
<PAGE>
PART II: THE UAM FUNDS IN
DETAIL
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
II-2
<PAGE>
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 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.
II-3
<PAGE>
. 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
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
II-4
<PAGE>
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
. 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".
II-5
<PAGE>
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 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
<PAGE>
general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
II-7
<PAGE>
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 portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
- --------------------------------------------------------------------------------
Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. 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.
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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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded in only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs. Otherwise,
the portfolio would realize either no gain or a loss on the purchase of the
call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower price.
If security prices fall, the portfolio may lose an amount of money equal to
the difference between the value of the security and the premium it received.
Writing covered put options may deprive the portfolio of the opportunity to
profit from a decrease in the market price of the securities it would like to
acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract.
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price.
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. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include exposure
to a variety of different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease the portfolio's
exposure to interest rates, foreign currency rates, mortgage securities,
corporate borrowing rates, security prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the investments of the portfolio and its share price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence.
. Current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other resects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
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the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived credit
risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life, usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued
together with a debt security or preferred stock and that give the holder the
right to buy proportionate amount of common stock at a specified price.
Warrants are freely transferable and are traded on major exchanges. Unlike
rights, warrants normally have a life that measured in years and entitle the
holder to buy common stock of a company at a price that is usually higher than
the market price at the time the warrant is issued. Corporations often issue
warrants to make the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits of
owning a company, the portfolio must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization falls
with the range specified in the prospectus of the portfolio. Investors in
small and medium-sized companies typically take on greater risk and price
volatility than they would by investing in larger, more established companies.
This increased risk may be due to the greater business risks of their small or
medium size, limited markets and financial resources, narrow product lines and
frequent lack of management depth. The securities of small and medium
companies are often traded in the over-the-counter market and might not be
traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
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international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. The portfolio may invest in these investment funds subject to the
provisions of the 1940 Act. If a portfolio invests in such investment funds,
its shareholders will bear not only their proportionate share of the expenses
of the portfolio (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect a portfolio's investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt.
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends.
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions.
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit ability of a portfolio to invest a particular country or make
it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those
II-18
<PAGE>
applicable United States companies. The lack of comparable information makes
investment decisions concerning foreign countries more difficult and less
reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and erratic
price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces.
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable.
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
II-19
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and may
beunable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that will adopt the
Euro in all aspects of the investment process, including trading, foreign
exchange, payments, settlements, cash accounts, custody and accounting. Some
of the uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by 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.
II-20
<PAGE>
. 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
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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).
II-21
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not own.
To sell a security short an investor must borrow the security from someone
else to deliver to the buyer. The investor then replaces the security it
borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit if
the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire at
no extra cost. A portfolio will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio net
assets.
. The market value of the securities of any single issuer that have been sold
short by the portfolio would exceed the two percent (2%) of the value of
the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
II-22
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that the
amount deposited in the segregated account plus the amount deposited with the
broker is at least equal to the market value of the securities at the time
they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, the
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future. In
each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or deliver securities
until a later date. Typically, no income accrues on securities the portfolio
has committed to purchase before the securities are delivered, although the
portfolio may earn income on securities it has in a segregated account. The
portfolio will only enter into these types of transactions with the intention
of actually acquiring the securities, but may sell them before the settlement
date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Management Of The Fund
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with the fund for their
services as board members. UAM or its affiliates or CGFSC 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, which is currently comprised of 50 portfolios. Those people
with an asterisk beside their name are "interested persons" of the Fund as
that term is defined in the 1940 Act.
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM
Position Principal Occupations During the Past 5 from Fund as of Funds Complex
Name, Address, DOB with Fund years 4/30/99 as of 12/31/99
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management Company,
College Road -- RFD 3 Member Inc. and Great Island Investment Company, Inc.;
Meredith, NH 03253 President of Bennett Management Company from 1988
1/26/29 to 1993.
- ------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund since
10 Garden Street Member January 1999. Formerly, Vice President for Finance
Cambridge, MA 02138 and Administration and Treasurer of Radcliffe
8/14/51 College from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief Administrative
100 King Street West Member Officer of Philip Services Corp.; Formerly, a
P.O. Box 2440, LCD-1 Partner in the Philadelphia office of the law firm
Hamilton Ontario, Dechert Price & Rhoads and a Director of Hofler
Canada L8N-4J6 Corp.
4/21/42
- ------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of
16 West Madison Street Member Broventure Company, Inc.; Chairman of the Board of
Baltimore, MD 21201 Chektec Corporation and Cyber Scientific, Inc
8/5/48
- ------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, Inc. since 0 0
211 Congress Street Member March 1999 and Vice President UAM Trust Company
Boston, MA 02110 since January 1996; Principal of UAM Fund
2/24/53 Distributors, Inc. since December 1995; formerly
Vice President of UAM Investment Services, Inc.
from January 1999 to 1996 and a Director and Chief
Operating Officer of CS First Boston Investment
Management from 1993-1995.
- ------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director 0 0
One International Place Member; of United Asset Management Corporation; Director,
Boston, MA 02110 President Partner or Trustee of each of the Investment
3/21/35 and Companies of the Eaton Vance Group of Mutual Funds.
Chairman
- ------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of Dewey 0 0
One Financial Center Member Square Investors Corporation since 1988; Director
Boston, MA 02111 and Chief Executive Officer of H.T. Investors,
7/1/43 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, formerly Vice 0 0
211 Congress Street President of Operations, Development and Control
Boston, MA 02110 of Fidelity Investments in 1995; Treasurer of the
7/4/51 Fidelity Group of Mutual Funds from 1991 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of UAMFSI and 0 0
211 Congress Street UAMFDI; Associate Attorney of Ropes & Gray (a law
Boston, MA 02110 firm) from 1993 to 1995.
2/28/68
- ------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; formerly Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of CGFSC from 1995
Boston, MA 02110 to 1996; Senior Manager of Deloitte & Touche LLP
9/18/63 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 Ernst &
Boston, MA 02108 Young from 1988 to 1993.
11/23/65
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM
Position Principal Occupations During the Past 5 from Fund as of Funds Complex
Name, Address, DOB with Fund years 4/30/99 as of 12/31/99
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer of Chase Global Funds Services 0 0
73 Tremont Street Secretary Company since 1996. Senior Public Accountant with
Boston, MA 02108 Price Waterhouse LLP from 1991 to 1994.
4/12/69
</TABLE>
Investment Advisory And Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each agreement
with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the portfolios.
. Continuously reviews, supervises and administers the investment program of
the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Advisory Agreement, (2) reckless disregard by the adviser 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
II-25
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Members who are not parties to the Investment Advisory
Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-26
<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73 Tremont
Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and DST
Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas City,
Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of UAMSSC
is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-27
<PAGE>
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
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
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 Fund changed its name
to "UAM Funds Trust." The Fund's principal executive
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<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes of
shares of beneficial interest without shareholder approval. The Board has
authorized three classes of shares: Institutional Class, Institutional Service
Class, and Advisor Class. Not all of the portfolios issue all of the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of board members can elect
100% of the board 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
Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional, Institutional
Service and Advisor. The three classes represent interests in the same assets
of the portfolio and, except as discussed below, are identical in all
respects.
. Institutional Service Shares bear certain expenses related to shareholder
servicing and the distribution of such shares and have exclusive voting
rights with respect to matters relating to such distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing and
the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- -----------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
II-29
<PAGE>
Income dividends and capital gains distributions are reinvested in additional
shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net investment
income 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, a portfolio cannot predict
the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a separate
"regulated investment company") for federal tax purposes. The capital
gains/losses of one portfolio will not be offset against the capital
gains/losses of another portfolio.
"Buying a Dividend"
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 just 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.
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.
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<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued neither exceeding the asked prices nor less than
the bid prices. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The converted value is based upon the
bid price of the foreign currency against U.S. dollars quoted by any major
bank or by a broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "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.
II-31
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable
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rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the Board
may deem advisable; however, payment will be made wholly in cash unless the
governing board believes that economic or market conditions exist which would
make such a practice detrimental to the best interests of the Fund. If
redemptions are paid in investment securities, such securities will be valued
as set forth under "Valuation of Shares." A redeeming shareholder would
normally incur brokerage expenses if these securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to issue signature
guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will pay
your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
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time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
Performance Calculations
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
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<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the performance
of a portfolio. The Fund or UAMFDI may include this information in sales
literature and advertising. Appendix B lists the publications, indices and
averages that the fund may be use. These types of advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of or other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various independent
services that monitor the performance of investment companies, data
reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in mind
that
The composition of the investments in the reported indices and averages may be
different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may be
different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
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<PAGE>
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, as applicable.
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 the 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,
the 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. The portfolio intends to
qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to withholding
and other taxes imposed by foreign countries. These taxes would reduce the
portfolio's dividends but are included in the taxable income reported on your
tax statement if the 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.
Financial Statements
The following documents are included in 1999 Annual Report of each portfolio,
other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
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<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find information
on how the fund calculates this number under "Purchase, Redemption and Pricing
of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board," the NYSE is located on Wall Street and is the largest exchange in the
United States.
Portfolio refers to a single series of the Fund, while portfolios refer to all
of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal agency
that administers most of the federal securities laws in the United States. In
particular, the SEC administers the 1933 Act, the 1940 Act and the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-shareholder-
servicing agent.
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
II-2
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Appendix A: Description
Of Securities And Ratings
II-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 ar e
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.
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<PAGE>
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i. e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues s o 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 re payment 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, CCC Preferred stock rated BB, B, and CCC are regarded, 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, th
ese 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 t o 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 quality,
minus (-) 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not
expired, unless Standard & Poors' believes that such payments
will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
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.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
MJI International Equity Portfolio
Institutional Class Shares
Institutional Service Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectuses of the portfolios
dated July __, 1999. You may obtain a prospectus for a portfolio by contacting
the UAM Funds at the address listed above.
<PAGE>
<TABLE>
<S> <C>
Table Of Contents
Part I: Portfolio Summary.........................................................
MJI INTERNATIONAL EQUITY PORTFOLIO...............................................
What Investment Strategies May The Portfolio Use?...............................
What Are The Investment Policies Of The Portfolio?..............................
Fundamental Policies..........................................................
Non-Fundamental Policies......................................................
Who Is The Investment Adviser Of The Portfolio?.................................
What is the Investment Philosophy and Style of the Adviser?...................
Who Are Some Representative Institutional Clients Of The Adviser?.............
How Much Does The Portfolio Pay For Administrative Services?....................
Who Are The Principal Holders Of The Securities Of The Portfolio?...............
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?..........
Average Annual Total Return...................................................
Expenses........................................................................
Part II: The UAM Funds in Detail..................................................
DESCRIPTION OF PERMITTED INVESTMENTS.............................................
Debt Securities.................................................................
Types of Debt Securities......................................................
Terms to Understand...........................................................
Factors Affecting the Value of Debt Securities................................
Derivatives.....................................................................
Types of Derivatives..........................................................
Risks of Derivatives..........................................................
Equity Securities...............................................................
Types of Equity Securities....................................................
Risks of Investing in Equity Securities.......................................
Foreign Securities..............................................................
Types of Foreign Securities...................................................
Risks of Foreign Securities...................................................
The Euro......................................................................
Investment Companies............................................................
Repurchase Agreements...........................................................
Restricted Securities...........................................................
Securities Lending..............................................................
Short Sales.....................................................................
Description of Short Sales....................................................
Short Sales Against the Box...................................................
Restrictions on Short Sales...................................................
When-Issued, Forward Commitment and Delayed Delivery Transactions...............
MANAGEMENT OF THE FUND...........................................................
INVESTMENT ADVISORY AND OTHER SERVICES...........................................
Investment Adviser..............................................................
Control Of Adviser............................................................
Investment Advisory Agreement.................................................
Continuing an Advisory Agreement..............................................
Terminating an Advisory Agreement.............................................
Distributor.....................................................................
Administrative Services.........................................................
Administrator.................................................................
Sub-Administrator.............................................................
Sub-Transfer Agent and Sub-Shareholder Servicing Agent........................
Administrative Fees...........................................................
Custodian.......................................................................
Independent Public Accountant...................................................
BROKERAGE ALLOCATION AND OTHER PRACTICES.........................................
Selection of Brokers............................................................
Simultaneous Transactions.......................................................
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Brokerage Commissions.........................................................
Equity Securities...........................................................
Debt Securities.............................................................
CAPITAL STOCK AND OTHER SECURITIES.............................................
The Fund......................................................................
Description Of Shares And Voting Rights.......................................
Description of Shares.......................................................
Class Differences...........................................................
Dividends and Capital Gains Distributions.....................................
Dividend and Distribution Options...........................................
Taxes on Distributions......................................................
"Buying a Dividend".........................................................
PURCHASE REDEMPTION AND PRICING OF SHARES......................................
Net Asset Value Per Share.....................................................
Calculating NAV.............................................................
How the Fund Values it Assets...............................................
Purchase of Shares............................................................
In-Kind Purchases...........................................................
Redemption of Shares..........................................................
By Mail.....................................................................
By Telephone................................................................
Redemptions-In-Kind.........................................................
Signature Guarantees........................................................
Other Redemption Information................................................
Exchange Privilege............................................................
Transfer Of Shares............................................................
PERFORMANCE CALCULATIONS.......................................................
Total Return..................................................................
Yield.........................................................................
Comparisons...................................................................
TAXES..........................................................................
FINANCIAL STATEMENTS...........................................................
Glossary........................................................................
Appendix A: Description of Securities and Ratings..............................
MOODY'S INVESTORS SERVICE, INC.................................................
Preferred Stock Ratings.......................................................
Debt Ratings - Taxable Debt & Deposits Globally...............................
Short-Term Prime Rating System - Taxable Debt & Deposits Globally.............
STANDARD & POOR'S RATINGS SERVICES.............................................
Preferred Stock Ratings.......................................................
Long-Term Issue Credit Ratings................................................
Short-Term Issue Credit Ratings...............................................
DUFF & PHELPS CREDIT RATING CO.................................................
Long-Term Debt and Preferred Stock............................................
Short-Term Debt...............................................................
High Grade..................................................................
Good Grade..................................................................
Satisfactory Grade..........................................................
Non-Investment Grade........................................................
Default.....................................................................
FITCH IBCA RATINGS.............................................................
International Long-Term Credit Ratings........................................
Investment Grade............................................................
Speculative Grade...........................................................
International Short-Term Credit Ratings.....................................
Notes.......................................................................
Appendix B - Comparisons........................................................
</TABLE>
ii
<PAGE>
PART I: PORTFOLIO SUMMARY
<PAGE>
MJI INTERNATIONAL EQUITY PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below in
seeking its objective. This SAI describes each of these investments/strategies
and their risks in Part II under "Description of Permitted Investments." The
investments that are italicized are principal strategies and you can find more
information on these techniques in the prospectus of the portfolio. You can
find more information concerning the limits on the ability of the portfolio to
use these investments in "What Are the Investment Policies of the Portfolio?"
. Foreign securities (at least 65% of its total assets).
. Equity Securities (at least 65% of its total assets).
. Futures (for hedging purposes only).
. Forward currency exchange contracts (for hedging purposes only).
. Options (to enhance income or hedge risk).
. Swaps, caps, collars and floors (hedging purposes only).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the of the
U.S. government or any if its agencies or instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any issuer.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the u.s. government, and its agencies when a portfolio
adopts a temporary defensive position.
I-2
<PAGE>
. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 331/3% of the
portfolio's gross assets valued at the lower of market or cost.
. 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 purchasing debt securities in accordance with its
investment objectives and (ii) by lending its portfolio securities to
banks, brokers, dealers and other financial institutions so long as such
loans are not inconsistent with the 1940 Act, or the rules and regulations
or interpretations of the SEC thereunder.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i) making
any permitted borrowings mortgages or pledges or (ii) entering into option,
futures or repurchase transactions.
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.
. 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).
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Murray Johnstone International Limited is the investment adviser of the
portfolio. For its services, the portfolio pays its adviser a fee equal to
0.75% of its average age daily net assets. Due to the effect of fee waivers by
the adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For more information concerning the adviser, see
"Investment Advisory and Other Services" in Part II of this SAI.
What is the Investment Philosophy and Style of the Adviser?
A value orientation for country, currency and stock selection is key to the
adviser's investment philosophy. The adviser's management structure centers
around regional research teams which are specialized by geography. The
individuals within each team are responsible for conducting research within
each region as well as identifying particular stocks for possible inclusion
within portfolios. On-site, fundamental research is a primary component of the
evaluation process.
Who Are Some Representative Institutional Clients Of The Adviser?
As of the date of this SAI, the adviser's representative institutional clients
included: Ace Hardware, American Cancer Society, Royal Caribbean Cruises,
Siemens, Levitz, Franciscan Sisters, Rhode Island School of Design, Government
of Guam, City of Albany and Arkansas Police & Fire Retirement Systems.
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<PAGE>
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. The fund doesnot know whether these
clients approve or disapprove of the adviser or the advisory services
provided.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.06% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is calculated
at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record or
beneficially 5% or more of the shares of a portfolio:
<TABLE>
<CAPTION>
Name and Address of Shareholder Percentage of Shares Owned
<S> <C>
- ------------------------------------------------------------------------------------
____________________________________________________________________________________
____________________________________________________________________________________
</TABLE>
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- -------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. For more information concerning the performance
of the portfolio, including the way it calculates its performance figures, see
"Performance Calculations" in Part II of this SAI.
Average Annual Total Return
<TABLE>
<CAPTION>
For the Periods Ended 1 Year 5 Years Shorter of 10 Years or
4/30/99 Since Inception Inception Date
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Class
- -------------------------------------------------------------------------------------------
Institutional Service Class
</TABLE>
I-4
<PAGE>
EXPENSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Investment
Advisory Fees Advisory Fees Administrator Sub-Administrator Brokerage
Paid Waived Fee Fee Commissions
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
-----------------------------------------------------------------------------------------------
1998
-----------------------------------------------------------------------------------------------
1997
</TABLE>
I-5
<PAGE>
PART II: THE UAM FUNDS IN DETAIL
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
II-2
<PAGE>
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 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.
II-3
<PAGE>
. 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
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
II-4
<PAGE>
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
. 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".
II-5
<PAGE>
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 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
II-6
<PAGE>
general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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<PAGE>
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 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.
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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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded in only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs. Otherwise,
the portfolio would realize either no gain or a loss on the purchase of the
call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower price.
If security prices fall, the portfolio may lose an amount of money equal to
the difference between the value of the security and the premium it received.
Writing covered put options may deprive the portfolio of the opportunity to
profit from a decrease in the market price of the securities it would like to
acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract .
. In the case of an index, the portfolio of securities that corresponds
to the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price.
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. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include exposure
to a variety of different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease the portfolio's
exposure to interest rates, foreign currency rates, mortgage securities,
corporate borrowing rates, security prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the investments of the portfolio and its share price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence.
. Current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other resects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
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the market values of preferred stock with a fixed
dividend rate and no conversion element varies inversely with interest rates
and perceived credit risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give
the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price that
is usually higher than the market price at the time the warrant is issued.
Corporations often issue warrants to make the accompanying debt security more
attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits of
owning a company, the portfolio must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization falls
with the range specified in the prospectus of the portfolio. Investors in
small and medium-sized companies typically take on greater risk and price
volatility than they would by investing in larger, more established companies.
This increased risk may be due to the greater business risks of their small or
medium size, limited markets and financial resources, narrow product lines and
frequent lack of management depth. The securities of small and medium
companies are often traded in the over-the-counter market and might not be
traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
II-17
<PAGE>
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. The portfolio may invest in these investment funds subject to the
provisions of the 1940 Act. If a portfolio invests in such investment funds,
its shareholders will bear not only their proportionate share of the expenses
of the portfolio (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect a portfolio's investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt.
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends.
. The economies of many foreign countries are dependnt on international trade
and their trading partners and they could be severely affected if their
trading partners were to enact protective trade barriers and economic
conditions .
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit ability of a portfolio to invest a particular country or make
it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those
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<PAGE>
applicable United States companies. The lack of comparable information makes
investment decisions concerning foreign countries more difficult and less
reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and erratic
price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces.
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable.
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
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<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates .
. Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that will adopt the
Euro in all aspects of the investment process, including trading, foreign
exchange, payments, settlements, cash accounts, custody and accounting. Some
of the uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by 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.
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<PAGE>
. 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
- -------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When 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
- -------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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).
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<PAGE>
. 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.
SHORT SALES
- -------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not own.
To sell a security short an investor must borrow the security from someone
else to deliver to the buyer. The investor then replaces the security it
borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit if
the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire at
no extra cost. A portfolio will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio net as
sets.
. The market value of the securities of any single issuer that have been sold
short by the portfolio would exceed the two percent (2%) of the value of
the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
II-22
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that
the amount deposited in the segregated account plus the amount deposited
with the broker is at least equal to the market value of the securities at
the time they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- -------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. In a forward delivery
transaction, the portfolio contracts to purchase securities for a fixed
price at a future date beyond customary settlement time. "Delayed delivery"
refers to securities transactions on the secondary market where settlement
occurs in the future. In each of these transactions, the parties fix the
payment obligation and the interest rate that they will receive on the
securities at the time the parties enter the commitment; however, they do
not pay money or deliver securities until a later date. Typically, no
income accrues on securities the portfolio has committed to purchase before
the securities are delivered, although the portfolio may earn income on
securities it has in a segregated account. The portfolio will only enter
into these types of transactions with the intention of actually acquiring
the securities, but may sell them before the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable
price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of
the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery
date, these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Management Of The Fund
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with
the fund for their services as board members. UAM or its affiliates or
CGFSC 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, which is currently comprised of 50 portfolios. Those
people with an asterisk beside their name are "interested persons" of the
Fund as that term is defined in the 1940 Act.
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as of Complex
Name, Address, DOB with Fund years 4/30/99 as of 12/31/99
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management Company,
College Road -- RFD 3 Member Inc. and Great Island Investment Company, Inc.;
Meredith, NH 03253 President of Bennett Management Company from 1988
1/26/29 to 1993.
- -----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund since
10 Garden Street Member January 1999. Formerly, Vice President for Finance
Cambridge, MA 02138 and Administration and Treasurer of Radcliffe
8/14/51 College from 1991 to 1999.
- -----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief Administrative
100 King Street West Member Officer of Philip Services Corp.; Formerly, a
P.O. Box 2440, LCD-1 Partner in the Philadelphia office of the law firm
Hamilton Ontario, Dechert Price & Rhoads and a Director of Hofler
Canada L8N-4J6 Corp.
4/21/42
- -----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of
16 West Madison Street Member Broventure Company, Inc.; Chairman of the Board of
Baltimore, MD 21201 Chektec Corporation and Cyber Scientific, Inc
8/5/48
- -----------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, Inc. since 0 0
211 Congress Street Member March 1999 and Vice President UAM Trust Company
Boston, MA 02110 since January 1996; Principal of UAM Fund
2/24/53 Distributors, Inc. since December 1995; formerly
Vice President of UAM Investment Services, Inc.
from January 1999 to 1996 and a Director and Chief
Operating Officer of CS First Boston Investment
Management from 1993-1995.
- -----------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director 0 0
One International Place Member; of United Asset Management Corporation; Director,
Boston, MA 02110 President Partner or Trustee of each of the Investment
3/21/35 and Companies of the Eaton Vance Group of Mutual Funds.
Chairman
- -----------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board President and Chief Investment Officer of Dewey 0 0
One Financial Center Member Square Investors Corporation since 1988; Director
Boston, MA 02111 and Chief Executive Officer of H.T. Investors,
7/1/43 Inc., formerly a subsidiary of Dewey Square
- ------------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice President Executive Vice President and Chief Financial 0 0
One International Place Officer of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- ------------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI, formerly Vice 0 0
211 Congress Street President of Operations, Development and Control
Boston, MA 02110 of Fidelity Investments in 1995; Treasurer of the
7/4/51 Fidelity Group of Mutual Funds from 1991 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of UAMFSI and 0 0
211 Congress Street UAMFDI; Associate Attorney of Ropes & Gray (a law
Boston, MA 02110 firm) from 1993 to 1995.
2/28/68
- ------------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; formerly Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of CGFSC from 1995
Boston, MA 02110 to 1996; Senior Manager of Deloitte & Touche LLP
9/18/63 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 Ernst &
Boston, MA 02108 Young from 1988 to 1993.
11/23/65
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation From UAM Funds
Position Principal Occupations During the Past 5 from Fund as of Complex
Name, Address, DOB with Fund years 4/30/99 as of 12/31/99
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer of Chase Global Funds Services 0 0
73 Tremont Street Secretary Company since 1996. Senior Public Accountant with
Boston, MA 02108 Price Waterhouse LLP from 1991 to 1994.
4/12/69
</TABLE>
Investment Advisory and Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated
in Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to
retain control over their investment advisory decisions is necessary to
allow them to continue to provide investment management services that are
intended to meet the particular needs of their respective clients.
Accordingly, after acquisition by UAM, UAM Affiliated Firms continue to
operate under their own firm name, with their own leadership and individual
investment philosophy and approach. Each UAM Affiliated Firm manages its
own business independently on a day-to-day basis. Investment strategies
employed and securities selected by UAM Affiliated Firms are separately
chosen by each of them. Several UAM Affiliated Firms also act as investment
advisers to separate series or portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each
agreement with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the
portfolios.
. Continuously reviews, supervises and administers the investment
program of the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence
on the part of the adviser in the performance of its obligations and duties
under the Advisory Agreement, (2) reckless disregard by the adviser 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
II-25
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one
year so long as such continuance is specifically approved at least annually
by a:
. Majority of those Members who are not parties to the Investment
Advisory Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders
of the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
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<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and
for distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73
Tremont Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and
DST Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas
City, Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of
UAMSSC is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-27
<PAGE>
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
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
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 Fund changed its name
to "UAM Funds Trust." The Fund's principal executive
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office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes of
shares of beneficial interest without shareholder approval. The Board has
authorized three classes of shares: Institutional Class, Institutional Service
Class, and Advisor Class. Not all of the portfolios issue all of the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of board members can elect
100% of the board 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
Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional, Institutional
Service and Advisor. The three classes represent interests in the same assets
of the portfolio and, except as discussed below, are identical in all
respects.
. Institutional Service Shares bear certain expenses related to shareholder
servicing and the distribution of such shares and have exclusive voting
rights with respect to matters relating to such distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing and
the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
II-29
<PAGE>
Income dividends and capital gains distributions are reinvested in additional
shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net investment
income 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, a portfolio cannot predict
the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a separate
"regulated investment company") for federal tax purposes. The capital
gains/losses of one portfolio will not be offset against the capital
gains/losses of another portfolio.
"Buying a Dividend"
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 just 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.
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.
II-30
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed securities
not traded on the valuation date for which market quotations are readily
available are valued neither exceeding the asked prices nor less than the bid
prices. Quotations of foreign securities in a foreign currency are converted
to U.S. dollar equivalents. The converted value is based upon the bid price of
the foreign currency against U.S. dollars quoted by any major bank or by a
broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "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.
II-31
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable
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<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the Board
may deem advisable; however, payment will be made wholly in cash unless the
governing board believes that economic or market conditions exist which would
make such a practice detrimental to the best interests of the Fund. If
redemptions are paid in investment securities, such securities will be valued
as set forth under "Valuation of Shares." A redeeming shareholder would
normally incur brokerage expenses if these securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Credit unions must be authorized to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will pay
your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The
governing board of the Fund may restrict the exchange privilege at any
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time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
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<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the performance
of a portfolio. The Fund or UAMFDI may include this information in sales
literature and advertising. Appendix B lists the publications, indices and
averages that the fund may be use. These types of advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various independent
services that monitor the performance of investment companies, data reported
in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in mind
that
The composition of the investments in the reported indices and averages may be
different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may be
different from the formula used by the portfolio to calculate its performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-35
<PAGE>
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, as applicable.
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 the 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,
the 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. The portfolio intends to
qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to withholding
and other taxes imposed by foreign countries. These taxes would reduce the
portfolio's dividends but are included in the taxable income reported on your
tax statement if the 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.
FINANCIAL STATEMENTS
The following documents are included in 1999 Annual Report of each portfolio,
other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
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<PAGE>
GLOSSARY
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<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-
administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find
information on how the fund calculates this number under "Purchase,
Redemption and Pricing of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or
"The Big Board," the NYSE is located on Wall Street and is the largest
exchange in the United States.
Portfolio refers to a single series of the Fund, while portfolios
refer to all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the
United States. In particular, the SEC administers the 1933 Act, the
1940 Act and the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds
Inc. II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-
shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same
meaning in the SAI as they do in the prospectus(es) of the portfolios.
II-2
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APPENDIX A: DESCRIPTION OF SECURITIES AND RATINGS
II-1
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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.
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<PAGE>
Baa Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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 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, CCC Preferred stock rated BB, B, and CCC are regarded, 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 quality,
minus (-) 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated D is in payment default. The
D rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not
expired, unless Standard & Poors' believes that such payments
will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
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.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
Pell Rudman Mid-Cap Growth Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However, you
should read it in conjunction with the prospectuses of the portfolios dated July
__, 1999. You may obtain a prospectus for a portfolio by contacting the UAM
Funds at the address listed above.
<PAGE>
<TABLE>
Table Of Contents
<S> <C>
Part I: Portfolio Summary.....................................................
TJ Core Equity Portfolio.....................................................
What Investment Strategies May The Portfolio Use?...........................
What Are The Investment Policies Of The Portfolio?..........................
Fundamental Policies......................................................
Non-Fundamental Policies..................................................
Who Is The Investment Adviser Of The Portfolio?.............................
What is the Investment Philosophy and Style of the Adviser?...............
Who Are Some Representative Institutional Clients Of The Adviser?.........
How Much Does The Portfolio Pay For Administrative Services?................
Who Are The Principal Holders Of The Securities Of The Portfolio?...........
What Was The Fund's Performance As Of Its Most Recent Fiscal Year End?......
Average Annual Total Return...............................................
Expenses....................................................................
Part II: The UAM Funds in Detail..............................................
Description of Permitted Investments.........................................
Debt Securities.............................................................
Types of Debt Securities..................................................
Terms to Understand.......................................................
Factors Affecting the Value of Debt Securities............................
Derivatives.................................................................
Types of Derivatives......................................................
Risks of Derivatives......................................................
Equity Securities...........................................................
Types of Equity Securities................................................
Risks of Investing in Equity Securities...................................
Foreign Securities..........................................................
Types of Foreign Securities...............................................
Risks of Foreign Securities...............................................
The Euro..................................................................
Investment Companies........................................................
Repurchase Agreements.......................................................
Restricted Securities.......................................................
Securities Lending..........................................................
Short Sales.................................................................
Description of Short Sales................................................
Short Sales Against the Box...............................................
Restrictions on Short Sales...............................................
When-Issued, Forward Commitment and Delayed Delivery Transactions...........
Management Of The Fund.......................................................
Investment Advisory and Other Services.......................................
Investment Adviser..........................................................
Control Of Adviser........................................................
Investment Advisory Agreement.............................................
Continuing an Advisory Agreement..........................................
Terminating an Advisory Agreement.........................................
Distributor.................................................................
Administrative Services.....................................................
Administrator.............................................................
Sub-Administrator.........................................................
Sub-Transfer Agent and Sub-Shareholder Servicing Agent....................
Administrative Fees.......................................................
Custodian...................................................................
Independent Public Accountant...............................................
Brokerage Allocation and Other Practices.....................................
Selection of Brokers........................................................
Simultaneous Transactions...................................................
Brokerage Commissions.......................................................
Equity Securities.........................................................
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Debt Securities..................................................................
Capital Stock and Other Securities..................................................
The Fund...........................................................................
Description Of Shares And Voting Rights............................................
Description of Shares............................................................
Class Differences................................................................
Dividends and Capital Gains Distributions..........................................
Dividend and Distribution Options................................................
Taxes on Distributions...........................................................
"Buying a Dividend"..............................................................
Purchase Redemption and Pricing of Shares...........................................
Net Asset Value Per Share..........................................................
Calculating NAV..................................................................
How the Fund Values it Assets....................................................
Purchase of Shares.................................................................
In-Kind Purchases................................................................
Redemption of Shares...............................................................
By Mail..........................................................................
By Telephone.....................................................................
Redemptions-In-Kind..............................................................
Signature Guarantees.............................................................
Other Redemption Information.....................................................
Exchange Privilege.................................................................
Transfer Of Shares.................................................................
Performance Calculations............................................................
Total Return.......................................................................
Yield..............................................................................
Comparisons........................................................................
Taxes...............................................................................
Financial Statements................................................................
Glossary.............................................................................
Appendix A: Description of Securities and Ratings...................................
Moody's Investors Service, Inc......................................................
Preferred Stock Ratings............................................................
Debt Ratings - Taxable Debt & Deposits Globally....................................
Short-Term Prime Rating System - Taxable Debt & Deposits Globally..................
Standard & Poor's Ratings Services..................................................
Preferred Stock Ratings............................................................
Long-Term Issue Credit Ratings.....................................................
Short-Term Issue Credit Ratings....................................................
Duff & Phelps Credit Rating Co......................................................
Long-Term Debt and Preferred Stock.................................................
Short-Term Debt....................................................................
High Grade.......................................................................
Good Grade.......................................................................
Satisfactory Grade...............................................................
Non-Investment Grade.............................................................
Default..........................................................................
Fitch IBCA Ratings..................................................................
International Long-Term Credit Ratings.............................................
Investment Grade.................................................................
Speculative Grade................................................................
International Short-Term Credit Ratings..........................................
Notes............................................................................
Appendix B - Comparisons.............................................................
</TABLE>
ii
<PAGE>
Part I: Portfolio
Summary
<PAGE>
Pell Rudman Mid-Cap Growth Portfolio
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below
in seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
limits on the ability of the portfolio to use these investments in "What
Are the Investment Policies of the Portfolio?"
. Equity securities (at least 65% in companies with market
capitalizations between $200 million and $10 billion at the time of
purchase).
. Foreign securities.
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total
assets at the time of purchase in securities of any single issuer
(other than obligations issued or guaranteed as to principal and
interest by the of the U.S. government or any if its agencies or
instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer.
. Invest more than 25% of its assets in companies within a single
industry; however, there are no limitations on investments made in
instruments issued or guaranteed by the u.s. government, and its
agencies when a portfolio adopts a temporary defensive position.
. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 331/3% of
the portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
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<PAGE>
. Purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal
in real estate and may purchase and sell securities which are secured
by interests in real estate.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making any permitted borrowings, mortgages or pledges, or (ii)
entering into repurchase transactions.
. Make loans except (i) by purchasing bonds, debentures or other similar
obligations which are publicly distributed (including repurchase
agreements provided however, that repurchase agreements maturing in
more than seven days, together with securities which are not readily
marketable, will not exceed 15% of the portfolio's total assets) and
(ii) by lending its portfolio securities to banks, brokers, dealers
and other financial institutions so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or
interpretations of the SEC thereunder.
.
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).
Who Is The Investment Adviser Of The Portfolio?
- --------------------------------------------------------------------------------
Pell Rudman Trust Company, N.A. is the investment adviser of the portfolio.
For its services, the portfolio pays its adviser a fee equal to 1.00% of
its average age daily net assets. Due to the effect of fee waivers by the
adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For more information concerning the adviser, see
"Investment Advisory and Other Services" in Part II of this SAI.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
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<PAGE>
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM
Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record
or beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
- --------------------------------------------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
Any shareholder listed above as owning 25% or more of the outstanding
shares of a portfolio may be presumed to "control" (as that term is defined
in the 1940 Act) the portfolio. Shareholders controlling the portfolio
could have the ability to vote a majority of the shares of the portfolio on
any matter requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- --------------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates
its current yield and average annual total return information according to
the methods required by the SEC. For more information concerning the
performance of the portfolio, including the way it calculates its
performance figures, see "Performance Calculations" in Part II of this SAI.
<TABLE>
<CAPTION>
Average Annual Total Return
For the Periods Shorter of 10 Years or
Ended 4/30/99 1 Year 5 Years Since Inception Inception Date
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EXPENSES
- -------------------------------------------------------------------------------------------------------
Investment Investment
Advisory Fees Advisory Fees Sub-Administrator Brokerage
Paid Waived Administrator Fee Fee Commissions
--------------------------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------------------------
1998
--------------------------------------------------------------------------------------------------
1997
</TABLE>
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<PAGE>
PART II: THE UAM FUNDS IN
DETAIL
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
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<PAGE>
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 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.
II-2
<PAGE>
. 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
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
II-3
<PAGE>
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
. 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".
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<PAGE>
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 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
II-5
<PAGE>
general, will change. While serving as a good estimator of prospective
returns, effective duration is an imperfect measure.
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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<PAGE>
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 portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
- --------------------------------------------------------------------------------
Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. 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.
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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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded in only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in
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losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs. Otherwise,
the portfolio would realize either no gain or a loss on the purchase of the
call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may cancel
an over-the-counter option by entering into an offsetting transaction with the
counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put option
to expire and the premium it received to offset the increase in the security's
value. If security prices remain the same over time, the portfolio would hope
to profit by closing out the put option at a lower price. If security prices
fall, the portfolio may lose an amount of money equal to the difference
between the value of the security and the premium it received. Writing covered
put options may deprive the portfolio of the opportunity to profit from a
decrease in the market price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract.
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price.
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. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include exposure
to a variety of different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease the portfolio's
exposure to interest rates, foreign currency rates, mortgage securities,
corporate borrowing rates, security prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the investments of the portfolio and its share price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence.
. Current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
EQUITY SECURITIES
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other resects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
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the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived credit
risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give
the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price that
is usually higher than the market price at the time the warrant is issued.
Corporations often issue warrants to make the accompanying debt security more
attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits of
owning a company, the portfolio must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization falls
with the range specified in the prospectus of the portfolio. Investors in
small and medium-sized companies typically take on greater risk and price
volatility than they would by investing in larger, more established companies.
This increased risk may be due to the greater business risks of their small or
medium size, limited markets and financial resources, narrow product lines and
frequent lack of management depth. The securities of small and medium
companies are often traded in the over-the-counter market and might not be
traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
FOREIGN SECURITIES
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
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international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. The portfolio may invest in these investment funds subject to the
provisions of the 1940 Act. If a portfolio invests in such investment funds,
its shareholders will bear not only their proportionate share of the expenses
of the portfolio (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect a portfolio's investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt.
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends.
. The economies of many foreign countries are dependent on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and economic
conditions.
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit ability of a portfolio to invest a particular country or make
it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those
II-17
<PAGE>
applicable United States companies. The lack of comparable information makes
investment decisions concerning foreign countries more difficult and less
reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States.
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and erratic
price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa.
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces.
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable.
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
II-18
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that will adopt the
Euro in all aspects of the investment process, including trading, foreign
exchange, payments, settlements, cash accounts, custody and accounting. Some
of the uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
INVESTMENT COMPANIES
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by 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.
II-19
<PAGE>
. 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
- --------------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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).
II-20
<PAGE>
. 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.
SHORT SALES
- ------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not own.
To sell a security short an investor must borrow the security from someone
else to deliver to the buyer. The investor then replaces the security it
borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit if
the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire at
no extra cost. A portfolio will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio net
assets.
. The market value of the securities of any single issuer that have been sold
short by the portfolio would exceed the two percent (2%) of the value of
the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that the
amount deposited in the segregated account plus the amount deposited with the
broker is at least equal to the market value of the securities at the time
they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction,
the portfolio contracts to purchase securities for a fixed price at a future
date beyond customary settlement time. "Delayed delivery" refers to
securities transactions on the secondary market where settlement occurs in the
future. In each of these transactions, the parties fix the payment obligation
and the interest rate that they will receive on the securities at the time the
parties enter the commitment; however, they do not pay money or deliver
securities until a later date. Typically, no income accrues on securities the
portfolio has committed to purchase before the securities are delivered,
although the portfolio may earn income on securities it has in a segregated
account. The portfolio will only enter into these types of transactions with
the intention of actually acquiring the securities, but may sell them before
the settlement date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
MANAGEMENT OF THE FUND
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with
the fund for their services as board members. UAM or its affiliates or CGFSC
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, which is currently comprised of 50 portfolios. Those people
with an asterisk beside their name are "interested persons" of the Fund as
that term is defined in the 1940 Act.
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation From UAM Funds
Position with Principal Occupations During the from Fund as of Complex as of
Name, Address, DOB Fund Past 5 years 4/30/99 12/31/99
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
John T. Bennett, Jr. Board Member President of Squam Investment Management Company,
College Road -- RFD 3 Inc. and Great Island Investment Company, Inc.;
Meredith, NH 03253 President of Bennett Management Company from 1988
1/26/29 to 1993.
- ----------------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Member Financial Officer of World Wildlife Fund since
10 Garden Street January 1999. Formerly, Vice President for Finance
Cambridge, MA 02138 and Administration and Treasurer of Radcliffe
8/14/51 College from 1991 to 1999.
- ----------------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Member Executive Vice President and Chief Administrative
100 King Street West Officer of Philip Services Corp.; Formerly, a
P.O. Box 2440, LCD-1 Partner in the Philadelphia office of the law firm
Hamilton Ontario, Dechert Price & Rhoads and a Director of Hofler
Canada L8N-4J6 Corp.
4/21/42
- ----------------------------------------------------------------------------------------------------------------------------------
Philip D. English Board Member President and Chief Executive Officer of
16 West Madison Street Broventure Company, Inc.; Chairman of the Board of
Baltimore, MD 21201 Chektec Corporation and Cyber Scientific, Inc
8/5/48
- ----------------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board Member President of UAM Investment Services, Inc. since 0 0
211 Congress Street March 1999 and Vice President UAM Trust Company
Boston, MA 02110 since January 1996; Principal of UAM Fund
2/24/53 Distributors, Inc. since December 1995; formerly
Vice President of UAM Investment Services, Inc.
from January 1999 to 1996 and a Director and Chief
Operating Officer of CS First Boston Investment
Management from 1993-1995.
- ----------------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Member; Chairman, Chief Executive Officer and a Director 0 0
One International Place President and of United Asset Management Corporation; Director,
Boston, MA 02110 Chairman Partner or Trustee of each of the Investment
3/21/35 Companies of the Eaton Vance Group of Mutual Funds.
- ----------------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board Member President and Chief Investment Officer of Dewey 0 0
One Financial Center Square Investors Corporation since 1988; Director
Boston, MA 02111 and Chief Executive Officer of H.T. Investors,
7/1/43 Inc., formerly a subsidiary of Dewey Square.
- ----------------------------------------------------------------------------------------------------------------------------------
William H. Park Vice President Executive Vice President and Chief Financial 0 0
One International Place Officer of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- ----------------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI, formerly Vice 0 0
211 Congress Street President of Operations, Development and Control
Boston, MA 02110 of Fidelity Investments in 1995; Treasurer of the
7/4/51 Fidelity Group of Mutual Funds from 1991 to 1995.
- ----------------------------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of UAMFSI and 0 0
211 Congress Street UAMFDI; Associate Attorney of Ropes & Gray (a law
Boston, MA 02110 firm) from 1993 to 1995.
2/28/68
- ----------------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; formerly Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of CGFSC from 1995
Boston, MA 02110 to 1996; Senior Manager of Deloitte & Touche LLP
9/18/63 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 Ernst &
Boston, MA 02108 Young from 1988 to 1993.
11/23/65
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-23
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation
Compensation From UAM Funds
Position with Principal Occupations During the from Fund as of Complex as of
Name, Address, DOB Fund Past 5 years 4/30/99 12/31/99
<S> <C> <C> <C> <C>
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
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each agreement
with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the portfolios.
. Continuously reviews, supervises and administers the investment program of
the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Advisory Agreement, (2) reckless disregard by the adviser 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
II-24
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Members who are not parties to the Investment Advisory
Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-25
<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73 Tremont
Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and DST
Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas City,
Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of UAMSSC
is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-26
<PAGE>
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
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
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 Fund changed its name
to "UAM Funds Trust." The Fund's principal executive
II-27
<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes of
shares of beneficial interest without shareholder approval. The Board has
authorized three classes of shares: Institutional Class, Institutional Service
Class, and Advisor Class. Not all of the portfolios issue all of the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of board members can elect
100% of the board 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
Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional, Institutional
Service and Advisor. The three classes represent interests in the same assets
of the portfolio and, except as discussed below, are identical in all
respects.
. Institutional Service Shares bear certain expenses related to shareholder
servicing and the distribution of such shares and have exclusive voting
rights with respect to matters relating to such distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing and
the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
II-28
<PAGE>
Income dividends and capital gains distributions are reinvested in additional
shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net investment
income 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, a portfolio cannot predict
the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a separate
"regulated investment company") for federal tax purposes. The capital
gains/losses of one portfolio will not be offset against the capital
gains/losses of another portfolio.
"Buying a Dividend"
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 just 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.
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.
II-29
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed securities
not traded on the valuation date for which market quotations are readily
available are valued neither exceeding the asked prices nor less than the bid
prices. Quotations of foreign securities in a foreign currency are converted
to U.S. dollar equivalents. The converted value is based upon the bid price of
the foreign currency against U.S. dollars quoted by any major bank or by a
broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "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.
II-30
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable
II-31
<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the Board
may deem advisable; however, payment will be made wholly in cash unless the
governing board believes that economic or market conditions exist which would
make such a practice detrimental to the best interests of the Fund. If
redemptions are paid in investment securities, such securities will be valued
as set forth under "Valuation of Shares." A redeeming shareholder would
normally incur brokerage expenses if these securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Credit unions must be authorized to issue signature guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will pay
your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The governing
board of the Fund may restrict the exchange privilege at any
II-32
<PAGE>
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
PERFORMANCE CALCULATIONS
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
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<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the performance
of a portfolio. The Fund or UAMFDI may include this information in sales
literature and advertising. Appendix B lists the publications, indices and
averages that the fund may be use. These types of advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various independent
services that monitor the performance of investment companies, data
reported in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in mind
that
The composition of the investments in the reported indices and averages may be
different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may be
different from the formula used by the portfolio to calculate its
performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-34
<PAGE>
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, as applicable.
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 the 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,
the 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. The portfolio intends to
qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to withholding
and other taxes imposed by foreign countries. These taxes would reduce the
portfolio's dividends but are included in the taxable income reported on your
tax statement if the 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.
FINANCIAL STATEMENTS
The following documents are included in 1999 Annual Report of each portfolio,
other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-35
<PAGE>
Glossary
II-1
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find information
on how the fund calculates this number under "Purchase, Redemption and Pricing
of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or "The Big
Board," the NYSE is located on Wall Street and is the largest exchange in the
United States.
Portfolio refers to a single series of the Fund, while portfolios refer to all
of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal agency
that administers most of the federal securities laws in the United States. In
particular, the SEC administers the 1933 Act, the 1940 Act and the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds Inc. II
and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-shareholder-
servicing agent.
All terms that this SAI does not otherwise define, have the same meaning in
the SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description of Securities and Ratings
<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, CCC Preferred stock rated BB, B, and CCC are regarded, 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 quality,
minus (-) 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poors' believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
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
BBB- economic cycles.
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.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
UAM Funds
PO Box 419081
Kansas City, MO 64141-6081
(Toll free) 1-877-UAM-LINK (826-5465)
TJ Core Equity Portfolio
Institutional Class Shares
Statement of Additional Information
July __, 1999
This statement of additional information (SAI) is not a prospectus. However,
you should read it in conjunction with the prospectuses of the portfolios
dated July __, 1999. You may obtain a prospectus for a portfolio by
contacting the UAM Funds at the address listed above.
<PAGE>
Part I: Portfolio
Summary
<PAGE>
TJ CORE EQUITY PORTFOLIO
WHAT INVESTMENT STRATEGIES MAY THE PORTFOLIO USE?
- --------------------------------------------------------------------------------
The portfolio may use the securities and investment strategies listed below in
seeking its objective. This SAI describes each of these
investments/strategies and their risks in Part II under "Description of
Permitted Investments." The investments that are italicized are principal
strategies and you can find more information on these techniques in the
prospectus of the portfolio. You can find more information concerning the
ability of the portfolio to use these investments in "What Are the Investment
Policies of the Portfolio?"
. Equity securities (at least 65% of its total assets).
. Debt Securities -- Investment-grade (up to 35%).
. Foreign securities (up to 20%).
. Futures (to reduce transaction costs or remain fully invested).
. Foreign currency exchange contracts (for hedging purposes only).
. Options (to reduce transaction costs or remain fully invested).
. Investment company securities.
. Repurchase agreements.
. Restricted securities.
. Securities lending.
. When-issued securities.
WHAT ARE THE INVESTMENT POLICIES OF THE PORTFOLIO?
- -------------------------------------------------------------------------------
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:
. With respect to 75% of its assets, invest more than 5% of its total assets
at the time of purchase in the securities of any single issuer (other than
obligations issued or guaranteed as to principal and interest by the U.S.
government or any if its agencies or instrumentalities).
. With respect to 75% of its assets, purchase more than 10% of any class of
the outstanding voting securities of any one issuer.
. Invest more than 25% of its assets in companies within a single industry;
however, there are no limitations on investments made in instruments issued
or guaranteed by the U.S. government and its agencies.
I-2
<PAGE>
. Borrow, except from banks and as a temporary measure for extraordinary or
emergency purposes and then, in no event, in excess of 33 1/3 % of the
portfolio's gross assets valued at the lower of market or cost.
. Invest in physical commodities or contracts on physical commodities.
. 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 purchasing debt securities in accordance with its
investment objectives, (ii) entering into repurchase agreements or (iii) by
lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the
1940 Act or the rules and regulations or interpretations of the SEC
thereunder.
. Underwrite the securities of other issuers.
. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i) making
any permitted borrowings, mortgages or pledges, or (ii) entering into
option, futures or repurchase transactions.
Non-Fundamental Policies
The following limitations are non-fundamental, which means the portfolio may
change them without shareholder approval. The portfolio will not:
. Invest in futures and/or options on futures unless not more than 5% of its
assets are required as deposit to secure obligations under such futures
and/or options on futures contracts. The portfolio may exclude from this
calculation, options that are in-the-money at the time of purchase.
. Invest more than 20% of its assets in futures and/or options on futures.
. 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.
. Purchase on margin or sell short except as specified herein.
. 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).
. Purchase additional securities when its borrowings exceed 5% of its total
assets.
. Pledge, mortgage or hypothecate any of its assets to an extent greater than
331/3 of its total assets at fair market value.
WHO IS THE INVESTMENT ADVISER OF THE PORTFOLIO?
- ------------------------------------------------------------------------------
Tom Johnson Investment Management is the investment adviser of the portfolio.
For its services, the portfolio pays its adviser a fee equal to 1.00% of the
average daily net assets of the portfolio. Due to the effect of fee waivers by
the adviser, the actual percentage of average net assets that the portfolio
pays in any given year may be different from the rate set forth in its
contract with the adviser. For more information concerning the adviser, see
"Investment Advisory and Other Services" in Part II of this SAI.
What is the Investment Philosophy and Style of the Adviser?
The adviser's investment philosophy is a conservative one which stresses
adequate diversification, risk reduction, and consistency of returns. The firm
maintains strong disciplines and emphasizes long-term
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results. The adviser's initial goal is preservation of capital; thus, high
quality issues are emphasized. Secondary goals include income and capital
appreciation. Thorough fundamental economic, industry, and company analyses
provide the framework within which all investment alternatives are evaluated.
Who Are Some Representative Institutional Clients Of The Adviser?
As of the date of this SAI, the adviser's representative institutional clients
included: LL Bean, Oklahoma Teachers' Retirement System, Presbyterian Health
Foundation, Service Corporation International and University of Texas Ex-
Students' Association.
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. The fund does not know whether these
clients approve or disapprove of the adviser or the advisory services
provided.
HOW MUCH DOES THE PORTFOLIO PAY FOR ADMINISTRATIVE SERVICES?
- --------------------------------------------------------------------------------
In exchange for administrative services, the portfolio pays a fee to UAMFSI
calculated at the annual rate of:
. $14,500 for the first operational class; plus
. $3,000 for each additional class; plus
. 0.04% of the aggregate net assets of the portfolio.
The portfolio also pays a fee to UAMFSI for sub-administration and other
services provided by CGFSC. The fee, which UAMFSI pays to CGFSC, is
calculated at the annual rate of:
. $52,500 for the first operational class; plus
. $7,500 for each additional operational class; plus
. 0.039% of their pro rata share of the combined assets of the UAM Funds.
WHO ARE THE PRINCIPAL HOLDERS OF THE SECURITIES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
As of April 30, 1999, the following persons or organizations held of record or
beneficially 5% or more of the shares of a portfolio:
Name and Address of Shareholder Percentage of Shares Owned
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Any shareholder listed above as owning 25% or more of the outstanding shares
of a portfolio may be presumed to "control" (as that term is defined in the
1940 Act) the portfolio. Shareholders controlling the portfolio could have the
ability to vote a majority of the shares of the portfolio on any matter
requiring the approval of shareholders of the portfolio.
WHAT WAS THE PORTFOLIO'S PERFORMANCE AS OF ITS MOST RECENT FISCAL YEAR END?
- ---------------------------------------------------------------------------
The portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The portfolio calculates its
current yield and average annual total return information according to the
methods required by the SEC. For more information concerning the performance
of the portfolio, including the way it calculates its performance figures, see
"Performance Calculations" in Part II of this SAI.
I-4
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
For the Periods Ended 1 Year 5 Years Shorter of 10 Years or Inception Date
4/30/99 Since Inception
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
EXPENSES
<TABLE>
<CAPTION>
Investment Investment Administrator Sub-Administrator Fee Brokerage
Advisory Fees Advisory Fees Fee Commissions
Paid Waived
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
-----------------------------------------------------------------------------------------------------
1998
-----------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------
</TABLE>
I-5
<PAGE>
PART II: THE UAM FUNDS IN DETAIL
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS
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.
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.
II-2
<PAGE>
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 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.
II-3
<PAGE>
. 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
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
II-4
<PAGE>
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
. 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".
II-5
<PAGE>
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 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.
II-6
<PAGE>
Factors Affecting the Value of Debt Securities
The total return of a debt instrument is composed of two elements: the
percentage change in the security's price and interest income earned. The
yield to maturity of a debt security estimates its total return only if the
price of the debt security remains unchanged during the holding period and
coupon interest is reinvested at the same yield to maturity. The total return
of a debt instrument, therefore, will be determined not only by how much
interest is earned, but also by how much the price of the security and
interest rates change.
Interest Rates
The price of a debt security generally moves in the opposite direction from
interest rates (i.e., if interest rates go up, the value of the bond will go
down, and vice versa).
Prepayment Risk
This risk effects mainly mortgage-backed securities. Unlike other debt
securities, falling interest rates can hurt mortgage-backed securities, which
may cause your share price to fall. Lower rates motivate people to pay off
mortgage-backed and asset-backed securities earlier than expected. The
portfolio may then have to reinvest the proceeds from such prepayments at
lower interest rates, which can reduce its yield. The unexpected timing of
mortgage and asset-backed prepayments caused by the variations in interest
rates may also shorten or lengthen the average maturity of the portfolio. If
left unattended, drifts in the average maturity of the portfolio can have the
unintended effect of increasing or reducing the effective duration of the
portfolio, which may adversely affect the expected performance of the
portfolio.
Extension Risk
The other side of prepayment risk occurs when interest rates are rising.
Rising interest rates can cause 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
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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 portfolio is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the above-stated ratings.
DERIVATIVES
- --------------------------------------------------------------------------------
Derivatives are financial instruments whose value is based on an underlying
asset, such as a stock or a bond, an underlying economic factor, such as an
interest rate or a market benchmark, such as an index. 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.
II-8
<PAGE>
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.
Forward Foreign Currency Exchange Contracts
A forward foreign currency contract involves an obligation to purchase or sell
a specific amount of currency at a future date or date range at a specific
price. In the case of a cancelable forward contract, the holder has the
unilateral right to cancel the contract at maturity by paying a specified fee.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. Unlike futures contracts, forward
contracts:
. Do not have standard maturity dates or amounts (i.e., the parties to the
contract may fix the maturity date and the amount).
. Are traded in the inter-bank markets conducted directly between currency
traders (usually large commercial banks) and their customers, as opposed to
futures contracts which are traded in only on exchanges regulated by the
CFTC.
. Do not require an initial margin deposit.
. May be closed by entering into a closing transaction with the currency
trader who is a party to the original forward contract, as opposed to a
commodities exchange.
Foreign Currency Hedging Strategies
A "settlement hedge" or "transaction hedge" is designed to protect the
portfolio against an adverse change in foreign currency values between the
date a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. The portfolio may also use forward contracts to purchase or sell a
foreign currency when it anticipates purchasing or selling securities
denominated in foreign currency, even if it has not yet selected the specific
investments.
The portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. Such a hedge,
sometimes referred to as a "position hedge," would tend to offset both
positive and negative currency fluctuations, but would not offset changes in
security values caused by other factors. The portfolio could also hedge the
position by selling another currency expected to perform similarly to the
currency in which the portfolio's investment is denominated. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in
terms of cost, yield, or efficiency, but generally would not hedge currency
exposure as effectively as a direct hedge into U.S. dollars. Proxy hedges may
result in
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losses if the currency used to hedge does not perform similarly to
the currency in which the hedged securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange that one can
achieve at some future point in time. Additionally, these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency
and to limit any potential gain that might result from the increase in value
of such currency.
The portfolio may enter into forward contracts to shift its investment
exposure from one currency into another. Such transactions may call for the
delivery of one foreign currency in exchange for another foreign currency,
including currencies in which its securities are not then denominated. This
may include shifting exposure from U.S. dollars to a foreign currency, or from
one foreign currency to another foreign currency. This type of strategy,
sometimes known as a "cross-hedge," will tend to reduce or eliminate exposure
to the currency that is sold, and increase exposure to the currency that is
purchased. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause the portfolio to assume the risk of
fluctuations in the value of the currency it purchases. Cross hedging
transactions also involve the risk of imperfect correlation between changes in
the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the portfolio may have to purchase additional foreign currency on
the spot market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the
portfolio may have to sell on the spot market some of the foreign currency it
received upon the sale of a security if the market value of such security
exceeds the amount of foreign currency it is obligated to deliver.
Options
An option is a contract between two parties for the purchase and sale of a
financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the
right to sell the security). Options have various types of underlying
instruments, including specific securities, indices of securities prices,
foreign currencies, interest rates and futures contracts. Options may be
traded on an exchange (exchange-traded-options) or may be customized
agreements between the parties (over-the-counter or "OTC options"). Like
futures, a financial intermediary, known as a clearing corporation,
financially backs exchange-traded options. However, OTC options have no such
intermediary and are subject to the risk that the counter-party will not
fulfill its obligations under the contract.
Purchasing Put and Call Options
When the portfolio purchases a put option, it buys the right to sell the
instrument underlying the option at a fixed strike price. In return for this
right, the portfolio pays the current market price for the option (known as
the "option premium"). The portfolio may purchase put options to offset or
hedge against a decline in the market value of its securities ("protective
puts") or to benefit from a decline in the price of securities that it does
not own. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs. However, if the
price of the underlying instrument does not fall enough to offset the cost of
purchasing the option, a put buyer would lose the premium and related
transaction costs.
Call options are similar to put options, except that the portfolio obtains the
right to purchase, rather than sell, the underlying instrument at the option's
strike price. The portfolio would normally purchase call options in
anticipation of an increase in the market value of securities it owns or wants
to buy. The portfolio would ordinarily realize a gain if, during the option
period, the value of the underlying instrument exceeded the
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exercise price plus the premium paid and related transaction costs. Otherwise,
the portfolio would realize either no gain or a loss on the purchase of the
call option.
The purchaser of an option may terminate its position by:
. Allowing it to expire and losing its entire premium;
. Exercising the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at the
strike price; or
. Closing it out in the secondary market at its current price.
Selling (Writing) Put and Call Options
When the portfolio writes a call option it assumes an obligation to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. Similarly, when
the portfolio writes a put option it assumes an obligation to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. The portfolio may
terminate its position in an exchange-traded put option before exercise by
buying an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting transaction
with the counter-party to the option.
The portfolio could try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on those
securities. If security prices rise, the portfolio would expect the put
option to expire and the premium it received to offset the increase in the
security's value. If security prices remain the same over time, the
portfolio would hope to profit by closing out the put option at a lower price.
If security prices fall, the portfolio may lose an amount of money equal to
the difference between the value of the security and the premium it received.
Writing covered put options may deprive the portfolio of the opportunity to
profit from a decrease in the market price of the securities it would like to
acquire.
The characteristics of writing call options are similar to those of writing
put options, except that call writers expect to profit if prices remain the
same or fall. The portfolio could try to hedge against a decline in the value
of securities it already owns by writing a call option. If the price of that
security falls as expected, the portfolio would expect the option to expire
and the premium it received to offset the decline of the security's value.
However, the portfolio must be prepared to deliver the underlying instrument
in return for the strike price, which may deprive it of the opportunity to
profit from an increase in the market price of the securities it holds.
The portfolio is permitted only to write covered options. The portfolio can
cover a call option by owning, at the time of selling the option:
. The underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate, foreign
currency or futures contract.
. A call option on the same security or index with the same or lesser
exercise price.
. A call option on the same security or index with a greater exercise price
and segregating cash or liquid securities in an amount equal to the
difference between the exercise prices.
. Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures contract.
. In the case of an index, the portfolio of securities that corresponds to
the index.
The portfolio can cover a put option by, at the time of selling the option:
. Entering into a short position in the underlying security.
. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise price.
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. Purchasing a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and segregating
cash or liquid securities in an amount equal to the difference between the
exercise prices.
. 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. 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.
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Swap Agreements
Swap agreements are individually negotiated and structured to include exposure
to a variety of different types of investments or market factors. Depending on
their structure, swap agreements may increase or decrease the portfolio's
exposure to interest rates, foreign currency rates, mortgage securities,
corporate borrowing rates, security prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names.
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.
Swap agreements tend to shift the investment exposure of the portfolio from
one type of investment to another. For example, if the portfolio agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the investments of the portfolio and its share price.
The most significant factor in the performance of swap agreements is the
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.
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. The portfolio will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. 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.
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.
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Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence.
. Current and anticipated short-term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration of the
contract.
. A difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops.
. 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.
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Management Risk
If the adviser incorrectly predicts stock market and interest rate trends, the
portfolio may lose money by investing in derivatives. For example, if the
portfolio were to write a call option based on its adviser's expectation that
the price of the underlying security would fall, but the price were to rise
instead, the portfolio could be required to sell the security upon exercise at
a price below the current market price. Similarly, if the portfolio were to
write a put option based on the adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the
portfolio could be required to purchase the security upon exercise at a price
higher than the current market price.
Volatility and Leverage
The prices of derivatives are volatile (i.e., they may change rapidly,
substantially and unpredictably) and are influenced by a variety of factors,
including
. Actual and anticipated changes in interest rates,
. Fiscal and monetary policies
. 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.
Equity Securities
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Types of Equity Securities
Common Stocks
Common stocks represent units of ownership in a company. Common stocks
usually carry voting rights and earn dividends. Unlike preferred stocks,
which are described below, dividends on common stocks are not fixed but are
declared at the discretion of the company's board of directors.
Preferred Stocks
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other resects, preferred stocks
are subordinated to the liabilities of the issuer. Unlike common stocks,
preferred stocks are generally not entitled to vote on corporate matters.
Types of preferred stocks include adjustable-rate preferred stock, fixed
dividend preferred stock, perpetual preferred stock, and sinking fund
preferred stock. Generally,
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the market values of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived credit
risk.
Convertible Securities
Convertible securities are debt securities and preferred stocks that are
convertible into common stock at a specified price or conversion ratio. In
exchange for the conversion feature, many corporations will pay a lower rate
of interest on convertible securities than debt securities of the same
corporation. Their market price tends to go up if the stock price moves up.
Convertible securities are subject to the same risks as similar securities
without the convertible feature. The price of a convertible security is more
volatile during times of steady interest rates than other types of debt
securities.
Rights and Warrants
A right is a privilege granted to exiting shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued.
Rights normally have a short life, usually two to four weeks, are freely
transferable and entitle the holder to buy the new common stock at a lower
price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give
the holder the right to buy proportionate amount of common stock at a
specified price. Warrants are freely transferable and are traded on major
exchanges. Unlike rights, warrants normally have a life that measured in
years and entitle the holder to buy common stock of a company at a price that
is usually higher than the market price at the time the warrant is issued.
Corporations often issue warrants to make the accompanying debt security more
attractive.
An investment in warrants and rights may entail greater risks than certain
other types of investments. Generally, rights and warrants do not carry the
right to receive dividends or exercise voting rights with respect to the
underlying securities, and they do not represent any rights in the assets of
the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in rights and
warrants increases the potential profit or loss to be realized from the
investment as compared with investing the same amount in the underlying
securities.
Risks of Investing in Equity Securities
General Risks of Investing in Stocks
While investing in stocks allows a portfolio to participate in the benefits of
owning a company, the portfolio must accept the risks of ownership. Unlike
bondholders, who have preference to a company's earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company's stock will usually
react more strongly to actual or perceived changes in the company's financial
condition or prospects than its debt obligations. Stockholders of a company
that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
. Factors that directly relate to that company, such as decisions made by its
management or lower demand for the company's products or services.
. Factors affecting an entire industry, such as increases in production
costs.
. Changes in financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency
exchange rates or inflation rates.
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Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Small and Medium-Sized Companies
A small or medium-sized company is a company whose market capitalization falls
with the range specified in the prospectus of the portfolio. Investors in
small and medium-sized companies typically take on greater risk and price
volatility than they would by investing in larger, more established companies.
This increased risk may be due to the greater business risks of their small or
medium size, limited markets and financial resources, narrow product lines and
frequent lack of management depth. The securities of small and medium
companies are often traded in the over-the-counter market and might not be
traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Technology Companies
Stocks of technology companies have tended to be subject to greater volatility
than securities of companies that are not dependent upon or associated with
technological issues. Technology companies operate in various industries.
Since these industries frequently share common characteristics, an event or
issue affecting one industry may significantly influence other, related
industries. For example, technology companies may be strongly affected by
worldwide scientific or technological developments and their products and
services may be subject to governmental regulation or adversely affected by
governmental policies.
Foreign Securities
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Types of Foreign Securities
Foreign securities are debt and equity securities that are traded in markets
outside of the United States. The markets in which these securities are
located can be developed or emerging. People can invest in foreign securities
in a number of ways:
. They can invest directly in foreign securities denominated in a foreign
currency.
. They can invest in American Depositary Receipts.
. They can invest in investment funds.
American Depositary Receipts (ADRs)
American Depositary Receipts (ADRs) are certificates evidencing ownership of
shares of a foreign issuer. These certificates are issued by depository banks
and generally trade on an established market in the United States or
elsewhere. A custodian bank or similar financial institution in the issuer's
home country holds the underlying shares in trust. The depository bank may not
have physical custody of the underlying securities at all times and may charge
fees for various services, including forwarding dividends and interest and
corporate actions. ADRs are alternatives to directly purchasing the underlying
foreign securities in their national markets and currencies. However, ADRs
continue to be subject to many of the risks associated with investing directly
in foreign securities.
Emerging Markets
An "emerging country" is generally country that the International Bank for
Reconstruction and Development (World Bank) and the International Finance
Corporation would consider to be an emerging or developing country. Typically,
emerging markets are in countries that are in the process of
industrialization, with lower gross national products (GNP) than more
developed countries. There are currently over 130 countries that the
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international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
Investment Funds
Some emerging countries currently prohibit direct foreign investment in the
securities of their companies. Certain emerging countries, however, permit
indirect foreign investment in the securities of companies listed and traded
on their stock exchanges through investment funds that they have specifically
authorized. The portfolio may invest in these investment funds subject to the
provisions of the 1940 Act. If a portfolio invests in such investment funds,
its shareholders will bear not only their proportionate share of the expenses
of the portfolio (including operating expenses and the fees of the adviser),
but also will bear indirectly bear similar expenses of the underlying
investment funds. In addition, these investment funds may trade at a premium
over their net asset value.
Risks of Foreign Securities
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
Political and Economic Factors
Local political, economic, regulatory, or social instability, military action
or unrest, or adverse diplomatic developments may affect the value of foreign
investments. Listed below are some of the more important political and
economic factors that could negatively affect a portfolio's investments.
. The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, budget deficits
and national debt.
. Foreign governments sometimes participate to a significant degree, through
ownership interests or regulation, in their respective economies. Actions
by these governments could significantly influence the market prices of
securities and payment of dividends.
. The economies of many foreign countries are dependnt on international
trade and their trading partners and they could be severely affected if
their trading partners were to enact protective trade barriers and
economic conditions.
. The internal policies of a particular foreign country may be less stable
than in the United States. Other countries face significant external
political risks, such as possible claims of sovereignty by other countries
or tense and sometimes hostile border clashes.
. A foreign government may act adversely to the interests of U.S. investors,
including expropriation or nationalization of assets, confiscatory taxation
and other restrictions on U.S. investment. A country may restrict or
control foreign investments in its securities markets. These restrictions
could limit ability of a portfolio to invest a particular country or make
it very expensive for the portfolio to invest in that country. Some
countries require prior governmental approval, limit the types or amount of
securities or companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate their
investment income and capital gains.
Information and Supervision
There is generally less publicly available information about foreign companies
than companies based in the United States. For example, there are often no
reports and ratings published about foreign companies comparable to the ones
written about United States companies. Foreign companies are typically not
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those
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applicable United States companies. The lack of comparable information makes
investment decisions concerning foreign countries more difficult and less
reliable than domestic companies.
Stock Exchange and Market Risk
The adviser anticipates that in most cases an exchange or over-the-counter
(OTC) market located outside of the United States will be the best available
market for foreign securities. Foreign stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in the
United States. Foreign stocks markets tend to differ from those in the United
States in a number of ways:
. They are generally not as developed or efficient as, and more volatile,
than those in the United States .
. They have substantially less volume.
. Their securities tend to be less liquid and to experience rapid and erratic
price movements.
. Commissions on foreign stocks are generally higher and subject to set
minimum rates, as opposed to negotiated rates.
. Foreign security trading, settlement and custodial practices are often less
developed than those in U.S. markets.
. They may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign Currency Risk
While, the portfolio's net asset value is denominated in United States
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in a the value of a foreign currency
against the United States dollar will result in a corresponding change in
value of the securities held by a portfolio. Some of the factors that may
impair the investments denominated in a foreign currency are:
. It may be expensive to convert foreign currencies into United States
dollars and vice versa .
. Complex political and economic factors may significantly affect the values
of various currencies, including United States dollars, and their exchange
rates.
. Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures contracts,
since exchange rates may not be free to fluctuate in response to other
market forces.
. There may be no systematic reporting of last sale information for foreign
currencies or regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
. Available quotation information is generally representative of very large
round-lot transactions in the inter-bank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1 million)
where rates may be less favorable.
. The inter-bank market in foreign currencies is a global, around-the-clock
market. To the extent that a market is closed while the markets for the
underlying currencies remain open, certain markets may not always reflect
significant price and rate movements.
Taxes
Certain foreign governments levy withholding taxes on dividend and interest
income. Although in some countries the portfolio may recover a portion of
these taxes, the portion it cannot recover will reduce the income the
portfolio receives from its investments. The portfolio does not expect such
foreign withholding taxes to have a significant impact on performance.
II-19
<PAGE>
Emerging Markets
Investing in emerging markets may magnify the risks of foreign investing.
Security prices in emerging markets can be significantly more volatile than
those in more developed markets, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may:
. Have relatively unstable governments.
. Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets
. Offer less protection of property rights than more developed countries.
. Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
. Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
The Euro
The single currency for the European Economic and Monetary Union ("EMU"), the
Euro, is scheduled to replace the national currencies for participating member
countries over a period that began on January 1, 1999 and ends in July 2002.
At the end of that period, use of the Euro will be compulsory and countries in
the EMU will no longer maintain separate currencies in any form. Until then,
however, each country and issuers within each country are free to choose
whether to use the Euro.
On January 1, 1999, existing national currencies became denominations of the
Euro at fixed rates according to practices prescribed by the European Monetary
Institute and the Euro became available as a book-entry currency. On or about
that date, member states began conducting financial market transactions in
Euros and redenominating many investments, currency balances and transfer
mechanisms into Euros. The portfolio also anticipates pricing, trading,
settling and valuing investments whose nominal values remain in their existing
domestic currencies in Euros. Accordingly, the portfolio expects the
conversion to the Euro to impact investments in countries that will adopt the
Euro in all aspects of the investment process, including trading, foreign
exchange, payments, settlements, cash accounts, custody and accounting. Some
of the uncertainties surrounding the conversion to the Euro include:
. Will the payment and operational systems of banks and other financial
institutions be ready by the scheduled launch date?
. Will the conversion to the Euro have legal consequences on outstanding
financial contracts that refer to existing currencies rather than Euro?
. How will existing currencies be exchanged into Euro?
. Will suitable clearing and settlement payment systems for the new currency
be created?
Investment Companies
- --------------------------------------------------------------------------------
A portfolio may buy and sell shares of other investment companies. Such
investment companies may pay management and other fees that are similar to the
fees currently paid by 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.
II-20
<PAGE>
. 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
- -----------------------------------------------------------------------------
In a repurchase agreement, an investor agrees to buy a security (underlying
security) from a securities dealer or bank that is a member of the Federal
Reserve System (counter-party). At the time, the counter-party agrees to
repurchase the underlying security for the same price, plus interest.
Repurchase agreements are generally for a relatively short period (usually not
more than 7 days). The portfolios normally use repurchase agreements to earn
income on assets that are not invested.
When 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
- -------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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).
II-21
<PAGE>
. 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.
SHORT SALES
- --------------------------------------------------------------------------------
Description of Short Sales
Selling a security short is when an investor sells a security it does not own.
To sell a security short an investor must borrow the security from someone
else to deliver to the buyer. The investor then replaces the security it
borrowed by purchasing it at the market price at or before the time of
replacement. Until it replaces the security, the investor repays the person
that lent it the security for any interest or dividends that may have accrued
during the period of the loan.
Investors typically sell securities short to:
. Take advantage of an anticipated decline in prices.
. Protect a profit in a security it already owns.
A portfolio can lose money if the price of the security it sold short
increases between the date of the short sale and the date on which the
portfolio replaces the borrowed security. Likewise, a portfolio can profit if
the price of the security declines between those dates.
To borrow the security, a portfolio also may be required to pay a premium,
which would increase the cost of the security sold. A portfolio will incur
transaction costs in effecting short sales. A portfolio's gains and losses
will be decreased or increased, as the case may be, by the amount of the
premium, dividends, interest, or expenses the portfolio may be required to pay
in connection with a short sale.
The broker will retain the net proceeds of the short sale, to the extent
necessary to meet margin requirements, until the short position is closed out.
Short Sales Against the Box
In addition, a portfolio may engage in short sales "against the box". In a
short sale against the box, the portfolio agrees to sell at a future date a
security that it either contemporaneously owns or has the right to acquire at
no extra cost. A portfolio will incur transaction costs to open, maintain and
close short sales against the box.
Restrictions on Short Sales
A portfolio will not short sell a security if:
. After giving effect to such short sale, the total market value of all
securities sold short would exceed 25% of the value of the portfolio net
assets.
. The market value of the securities of any single issuer that have been sold
short by the portfolio would exceed the two percent (2%) of the value of
the portfolio's net assets.
. Such securities would constitute more than two percent (2%) of any class of
the issuer's securities.
Whenever a portfolio sells a security short, its custodian segregates an
amount of cash or liquid securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. Government securities the portfolio is required to
deposit with the broker in connection
II-22
<PAGE>
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily in an attempt to ensure that the
amount deposited in the segregated account plus the amount deposited with the
broker is at least equal to the market value of the securities at the time
they were sold short.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED DELIVERY TRANSACTIONS
- --------------------------------------------------------------------------------
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, the
portfolio contracts to purchase securities for a fixed price at a future date
beyond customary settlement time. "Delayed delivery" refers to securities
transactions on the secondary market where settlement occurs in the future. In
each of these transactions, the parties fix the payment obligation and the
interest rate that they will receive on the securities at the time the parties
enter the commitment; however, they do not pay money or deliver securities
until a later date. Typically, no income accrues on securities the portfolio
has committed to purchase before the securities are delivered, although the
portfolio may earn income on securities it has in a segregated account. The
portfolio will only enter into these types of transactions with the intention
of actually acquiring the securities, but may sell them before the settlement
date.
The portfolio uses when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at
the time of purchase. When the portfolio engages in when-issued, delayed-
delivery and forward delivery transactions, it relies on the other party to
consummate the sale. If the other party fails to complete the sale, the
portfolio may miss the opportunity to obtain the security at a favorable price
or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the portfolio assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes
place also may be higher than those obtained in the transaction itself.
Because the portfolio does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
The portfolio will segregate cash and liquid securities equal in value to
commitments for the when-issued, delayed-delivery or forward delivery
transaction. The portfolio will segregate additional liquid assets daily so
that the value of such assets is equal to the amount of its commitments.
Management Of The Fund
The governing board manages the business of the fund. The governing board
elects officers who 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 that are affiliated with the fund for their
services as board members. UAM or its affiliates or CGFSC 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, which is currently comprised of 50 portfolios. Those people
with an asterisk beside their name are "interested persons" of the Fund as
that term is defined in the 1940 Act.
II-23
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Name, Address, DOB Position with Principal Occupations During the Past 5 Compensation From UAM
Fund Years from Fund as of Funds Complex
4/30/99 as of 12/31/99
<S> <C> <C> <C> <C>
John T. Bennett, Jr. Board President of Squam Investment Management
College Road -- RFD 3 Member Company, Inc. and Great Island Investment
Meredith, NH 03253 Company Inc.; President of Bennett Manage-
1/26/29 ment Company from 1988 to 1993.
- -----------------------------------------------------------------------------------------------------------------------------
Nancy J. Dunn Board Financial Officer of World Wildlife Fund since
10 Garden Street Member January 1999. Formerly, Vice President for Finance
Cambridge, MA 02138 and Administration and Treasurer of Radcliffe
8/14/51 College from 1991 to 1999.
- -----------------------------------------------------------------------------------------------------------------------------
William A. Humenuk Board Executive Vice President and Chief Administrative
100 King Street West Member Officer of Philip Services Corp.; Formerly, a
P.O. Box 2440, LCD-1 Partner in the Philadelphia office of the law firm
Hamilton Ontario, Dechert Price & Rhoads and a Director of Hofler
Canada L8N-4J6 Corp.
4/21/42
- -----------------------------------------------------------------------------------------------------------------------------
Philip D. English Board President and Chief Executive Officer of
16 West Madison Street Member Broventure Company, Inc.; Chairman of the Board of
Baltimore, MD 21201 Chektec Corporation and Cyber Scientific, Inc
8/5/48
- -----------------------------------------------------------------------------------------------------------------------------
James P. Pappas* Board President of UAM Investment Services, Inc. since 0 0
211 Congress Street Member March 1999 and Vice President UAM Trust Company
Boston, MA 02110 since January 1996; Principal of UAM Fund
2/24/53 Distributors, Inc. since December 1995; formerly
Vice President of UAM Investment Services, Inc.
from January 1999 to 1996 and a Director and Chief
Operating Officer of CS First Boston Investment
Management from 1993-1995.
- -----------------------------------------------------------------------------------------------------------------------------
Norton H. Reamer* Board Chairman, Chief Executive Officer and a Director 0 0
One International Place Member; of United Asset Management Corporation; Director,
Boston, MA 02110 President Partner or Trustee of each of the Investment
3/21/35 and Companies of the Eaton Vance Group of Mutual Funds.
Chairman
- -----------------------------------------------------------------------------------------------------------------------------
Peter M. Whitman, Jr.* Board Member President and Chief Investment Officer of Dewey 0 0
One Financial Center Square Investors Corporation since 1988; Director
Boston, MA 02111 and Chief Executive Officer of H.T. Investors,
7/1/43 Inc., formerly a subsidiary of Dewey Square.
- -----------------------------------------------------------------------------------------------------------------------------
William H. Park Vice President Executive Vice President and Chief Financial 0 0
One International Place Officer of United Asset Management Corporation.
Boston, MA 02110
9/19/47
- -----------------------------------------------------------------------------------------------------------------------------
Gary L. French Treasurer President of UAMFSI and UAMFDI, formerly Vice 0 0
211 Congress Street President of Operations, Development and Control
Boston, MA 02110 of Fidelity Investments in 1995; Treasurer of the
7/4/51 Fidelity Group of Mutual Funds from 1991 to 1995.
- -----------------------------------------------------------------------------------------------------------------------------
Michael E. DeFao Secretary Vice President and General Counsel of UAMFSI and 0 0
211 Congress Street UAMFDI; Associate Attorney of Ropes & Gray (a law
Boston, MA 02110 firm) from 1993 to 1995.
2/28/68
- -----------------------------------------------------------------------------------------------------------------------------
Robert R. Flaherty Assistant Vice President of UAMFSI; formerly Manager of Fund 0 0
211 Congress Street Treasurer Administration and Compliance of CGFSC from 1995
Boston, MA 02110 to 1996; Senior Manager of Deloitte & Touche LLP
9/18/63 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 Ernst &
Boston, MA 02108 Young from 1988 to 1993.
11/23/65
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Name, Address, DOB Position with Principal Occupations During the Past 5 Compensation From UAM
Fund Years from Fund as of Funds Complex
4/30/99 as of 12/31/99
<S> <C> <C> <C> <C>
Michelle Azrialy Assistant Assistant Treasurer of Chase Global Funds Services 0 0
73 Tremont Street Secretary Company since 1996. Senior Public Accountant with
Boston, MA 02108 Price Waterhouse LLP from 1991 to 1994.
4/12/69
</TABLE>
Investment Advisory And Other Services
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Control Of Adviser
Each adviser is a subsidiary of UAM. UAM is a holding company incorporated in
Delaware in December 1980 for the purpose of acquiring and owning firms
engaged primarily in institutional investment management. Since its first
acquisition in August 1983, UAM has acquired or organized more than 50 UAM
Affiliated Firms. UAM believes that permitting UAM Affiliated Firms to retain
control over their investment advisory decisions is necessary to allow them to
continue to provide investment management services that are intended to meet
the particular needs of their respective clients. Accordingly, after
acquisition by UAM, UAM Affiliated Firms continue to operate under their own
firm name, with their own leadership and individual investment philosophy and
approach. Each UAM Affiliated Firm manages its own business independently on a
day-to-day basis. Investment strategies employed and securities selected by
UAM Affiliated Firms are separately chosen by each of them. Several UAM
Affiliated Firms also act as investment advisers to separate series or
portfolios of the UAM Funds complex.
Investment Advisory Agreement
This section summarizes some of the important provisions of each of the
portfolio's Investment Advisory Agreements. The Fund has filed each agreement
with the SEC as part of its registration statement on Form N-1A.
Service Performed by Adviser
Each adviser:
. Manages the investment and reinvestment of the assets of the portfolios.
. Continuously reviews, supervises and administers the investment program of
the portfolios.
. Determines what portion of portfolio's assets will be invested in
securities and what portion will consist of cash.
Limitation of Liability
In the absence of (1) willful misfeasance, bad faith, or gross negligence on
the part of the adviser in the performance of its obligations and duties under
the Advisory Agreement, (2) reckless disregard by the adviser 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
II-25
<PAGE>
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
An Investment Advisory Agreement continues in effect for periods of one year
so long as such continuance is specifically approved at least annually by a:
. Majority of those Members who are not parties to the Investment Advisory
Agreement or interested persons of any such party;
. (2) (a) majority of the Members or (b) a majority of the shareholders of
the portfolio.
Terminating an Advisory Agreement
. The Fund may terminate an Investment Advisory Agreement at any time,
without the payment of any penalty if:
. A majority of the portfolio's shareholders vote to do so; and
. It gives the adviser 60 days' written notice.
. 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.
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.
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.
II-26
<PAGE>
. Charges and expenses of pricing and data services, independent public
accountants and custodians.
. Insurance premiums including fidelity bond premiums.
. Outside legal expenses.
. Costs of maintenance of corporate existence.
. Typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the 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.
Sub-Administrator
UAMFSI has subcontracted some of the its administrative and fund accounting
services to CGFSC, an affiliate of The Chase Manhattan Bank, under a Mutual
Funds Service Agreement dated October 26, 1998. CGFSC is located at 73 Tremont
Street, Boston, Massachusetts 02108.
Sub-Transfer Agent and Sub-Shareholder Servicing Agent
UAMFSI has subcontracted its transfer agent and dividend-disbursing agent
services to DST Systems, Inc. under an Agency Agreement between UAMFSI and DST
Systems Inc. DST Systems, Inc., is located at P.O. Box 419534, Kansas City,
Missouri 64141-6534.
UAMSSC serves as sub-shareholder servicing agent for the Fund under an
agreement between UAMSSC and UAMFSI. The principal place of business of UAMSSC
is 825 Duportail Road, Wayne, Pennsylvania 19087.
Administrative Fees
Each portfolio pay UAMFSI and CGFSC for the administrative services they
provide. For more information concerning these fees, see "How Much does the
Portfolio Pay for Administrative Services?" in Part I of this SAI.
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.
II-27
<PAGE>
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
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
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 Fund changed its name
to "UAM Funds Trust." The Fund's principal executive
II-28
<PAGE>
office is located at 211 Congress Street, Boston, MA 02110; however,
shareholders should direct all correspondence to the address listed on the
cover of this SAI.
DESCRIPTION OF SHARES AND VOTING RIGHTS
- --------------------------------------------------------------------------------
The Fund's Agreement and Declaration of Trust permits the Fund to issue an
unlimited number of shares of beneficial interest, without par value. The
Board has the power to designate one or more series (portfolios) or classes of
shares of beneficial interest without shareholder approval. The Board has
authorized three classes of shares: Institutional Class, Institutional Service
Class, and Advisor Class. Not all of the portfolios issue all of the classes.
Description of Shares
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 the Fund have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of board members can elect
100% of the board 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
Board.
If the Fund is liquidated, the shareholders of each portfolio or any class
thereof are entitled to receive the net assets belonging to that portfolio, or
in the case of a class, belonging to that portfolio and allocable to that
class. The Fund will distribute is net assets to its shareholders in
proportion to the number of shares of that portfolio or class thereof held by
them and recorded on the books of the Fund. A majority of the Board may
authorize the liquidation of any portfolio or class at any time.
The Fund will not hold annual meetings except when required to by the 1940 Act
or other applicable law.
Class Differences
The Board has authorized three classes of shares, Institutional, Institutional
Service and Advisor. The three classes represent interests in the same assets
of the portfolio and, except as discussed below, are identical in all
respects.
. Institutional Service Shares bear certain expenses related to shareholder
servicing and the distribution of such shares and have exclusive voting
rights with respect to matters relating to such distribution expenditures.
. Advisor Shares bear certain expenses related to shareholder servicing and
the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. Advisor
Shares also charge a sales load on purchases.
. Each class of shares has different exchange privileges.
Distribution and shareholder servicing fees reduce a class's:
. Net income
. Dividends
. NAV to the extent the portfolio has undistributed net income.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividend and Distribution Options
There are three ways for shareholders to receive dividends and capital gains:
II-29
<PAGE>
Income dividends and capital gains distributions are reinvested in additional
shares at net asset value
Income dividends are paid in cash and capital gains distributions are
reinvested in additional shares at NAV.
Income dividends and capital gains distributions are paid in cash.
Unless the shareholder elects otherwise in writing, the fund will
automatically reinvest all dividends in additional shares of the portfolio at
NAV (as of the business day following the record date). Shareholders may
change their dividend and distributions option by writing to the fund at least
three days before the record date for income dividend or capital gain
distribution.
The fund sends account statements to shareholders whenever it pays an income
dividend or capital gains distribution.
Taxes on Distributions
Each portfolio intends to distribute substantially all of its net investment
income 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, a portfolio cannot predict
the time or amount of any such dividends or distributions.
Each portfolio will be treated as a separate entity (and hence as a separate
"regulated investment company") for federal tax purposes. The capital
gains/losses of one portfolio will not be offset against the capital
gains/losses of another portfolio.
"Buying a Dividend"
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 just 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.
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.
II-30
<PAGE>
How the Fund Values it Assets
Equity Securities
Equity securities listed on a securities exchange for which market quotations
are readily available are valued at the last quoted sale price of the day.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted equity securities and listed securities
not traded on the valuation date for which market quotations are readily
available are valued neither exceeding the asked prices nor less than the bid
prices. Quotations of foreign securities in a foreign currency are converted
to U.S. dollar equivalents. The converted value is based upon the bid price of
the foreign currency against U.S. dollars quoted by any major bank or by a
broker.
Debt Securities
Debt securities are valued according to the broadest and most representative
market, which will ordinarily be the over-the-counter market. Debt securities
may be valued based on prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. Securities
purchased with remaining maturities of 60 days or less are valued at amortized
cost when the governing board determines that amortized cost reflects fair
value.
Other Assets
The value of other assets and securities for which no quotations are readily
available (including restricted securities) is determined in good faith at
fair value using methods determined by the governing board.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
Service Agents may enter confirmed purchase orders on behalf of their
customers. To do so, the Service Agent must receive your investment order
before the close of trading on the NYSE and must transmit it to the fund
before the close of its business day to receive that day's share price. The
fund must receive proper payment for the order by the time the portfolio
calculates its NAV on the following business day. Service Agents are
responsible to their customers and the Fund for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Shareholders can buy full and fractional (calculated to three decimal places)
shares of a portfolio. The fund will not issue certificates for fractional
shares and will only issue certificates for whole shares upon the written
request of a shareholder.
The Fund may reduce or waive the minimum for initial and subsequent investment
for certain fiduciary accounts, such as employee benefit plans or under
circumstances, where certain economies can be achieved in sales of the
portfolio's shares.
In-Kind Purchases
At its discretion, the fund may permit shareholders to purchase shares of the
portfolio with securities, instead of cash. If the fund allows a shareholder
to make an in-kind purchase, it will value such securities according to the
policies described under "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.
II-31
<PAGE>
. 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.
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.
Redemptions-In-Kind
If the governing board determines that it would be detrimental to the best
interests of remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in-kind of liquid securities held by the portfolio in lieu of
cash in conformity with applicable
II-32
<PAGE>
rules of the SEC. Investors may incur brokerage charges on the sale of
portfolio securities received in payment of redemptions.
However, the Fund has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the Board
may deem advisable; however, payment will be made wholly in cash unless the
governing board believes that economic or market conditions exist which would
make such a practice detrimental to the best interests of the Fund. If
redemptions are paid in investment securities, such securities will be valued
as set forth under "Valuation of Shares." A redeeming shareholder would
normally incur brokerage expenses if these securities were converted to cash.
Signature Guarantees
The fund requires signature guarantees for certain types of documents,
including.
. Written requests for redemption.
. Separate instruments for assignment ("stock power"), which should specify
the total number of shares to be redeemed
. On all stock certificates tendered for redemption.
The purpose of signature guarantees is to verify the identity of the person
who has authorized a redemption from your account and to protect your account,
the Fund and its sub-transfer agent from fraud.
The fund will accept signature guarantees from any eligible guarantor
institution, as defined by the Securities Exchange Act of 1934 that
participates in a signature guarantee program. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings
associations. You can get a complete definition of eligible guarantor
institutions by calling 1-877-826-5465. Broker-dealers guaranteeing
signatures must be a member of a clearing corporation or maintain net capital
of at least $100,000. Credit unions must be authorized to issue signature
guarantees.
Other Redemption Information
Normally, the fund will pay for all shares redeemed under proper procedures
within seven days after it received your request. However, the fund will pay
your redemption proceeds earlier as applicable law so requires.
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.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The exchange privilege is only available with respect to portfolios that are
qualified for sale in the shareholder's state of residence. Exchanges are
based on the respective net asset values of the shares involved. The
Institutional Class and Institutional Service Class shares of UAM Funds do not
charge a sales commission or charge of any kind for exchanges.
Neither the Fund nor any of its service providers will be responsible for the
authenticity of the exchange instructions received by telephone. The governing
board of the Fund may restrict the exchange privilege at any
II-33
<PAGE>
time. Such instructions may include limiting the amount or frequency of
exchanges and may be for the purpose of assuring such exchanges do not
disadvantage the Fund and its shareholders.
TRANSFER OF SHARES
- --------------------------------------------------------------------------------
Shareholders may transfer shares of the portfolio to another person by making
a written request to the Fund. Your request should clearly identify the
account and number of shares you wish to transfer. All registered owners
should sign the request and all stock certificates, if any, which are subject
to the transfer. The signature on the letter of request, the stock certificate
or any stock power must be guaranteed in the same manner as described under
"Signature Guarantees." As in the case of redemptions, the written request
must be received in good order before any transfer can be made.
Performance Calculations
Each portfolio measures its performance by calculating its yield and total
return. Yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The 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
II-34
<PAGE>
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.
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
- --------------------------------------------------------------------------------
To help investors evaluate how an investment in a portfolio might satisfy
their investment objectives, the Fund and UAMFDI may advertise the performance
of a portfolio. The Fund or UAMFDI may include this information in sales
literature and advertising. Appendix B lists the publications, indices and
averages that the fund may be use. These types of advertisements generally:
Discuss various measures of the performance of a portfolio.
Compare the performance of a portfolio to the performance of other
investments, indices or averages.
Compare the performance of a portfolio to data prepared by various independent
services that monitor the performance of investment companies, data reported
in financial and industry publications, and various indices.
In comparing the performance of a portfolio, an investor should keep in mind
that
The composition of the investments in the reported indices and averages may be
different from the composition of investments in the portfolio.
Indices and averages are generally unmanaged.
The formula used to calculate the performance of the index or average may be
different from the formula used by the portfolio to calculate its performance.
In addition, the fund cannot guarantee that a portfolio will continue this
performance as compared to such other average or index.
II-35
<PAGE>
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, as applicable.
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 the 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,
the 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. The portfolio intends to
qualify as a "regulated investment company" each year.
Dividends and interest received by the portfolio may give rise to withholding
and other taxes imposed by foreign countries. These taxes would reduce the
portfolio's dividends but are included in the taxable income reported on your
tax statement if the 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.
Financial Statements
The following documents are included in 1999 Annual Report of each portfolio,
other than the FPA Crescent Portfolio:
. Financial statements for the fiscal year ended April 30, 1999.
. Financial highlights for the respective periods presented
. The report of PricewaterhouseCoopers LLP.
The following documents are included in 1999 Annual Report of FPA Crescent
Portfolio:
. Financial statements for the fiscal year ended March 31, 1999.
. Financial highlights for the periods presented
. The report of PricewaterhouseCoopers LLP.
Each of the above-referenced documents is incorporated by reference into this
SAI. However, no other parts of the portfolios' Annual Reports are
incorporated by reference herein. Shareholders may get copies of the
portfolios' Annual Reports free of charge by calling the UAM Funds at the
telephone number appearing on the front page of this SAI.
II-36
<PAGE>
Glossary
<PAGE>
1933 Act means the Securities Act of 1933, as amended.
1934 Act means the Securities Exchange Act of 1934, as amended.
1940 Act means the Investment Company Act of 1940, as amended.
Adviser means the investment adviser of the portfolio.
Board member refers to a single member of the Fund's Board.
Board refers to the Fund's Board of Trustees as a group.
CGFSC is Chase Global Funds Service Company, the Fund's sub-
administrator.
Fund refers to UAM Funds Trust.
Governing Board, see Board.
NAV is the net asset value per share of a portfolio. You can find
information on how the fund calculates this number under "Purchase,
Redemption and Pricing of Shares."
NYSE is the New York Stock Exchange. Also known as "The Exchange" or
"The Big Board," the NYSE is located on Wall Street and is the largest
exchange in the United States.
Portfolio refers to a single series of the Fund, while portfolios
refer to all of the series of the Fund.
SEC is the Securities and Exchange Commission. The SEC is the federal
agency that administers most of the federal securities laws in the
United States. In particular, the SEC administers the 1933 Act, the
1940 Act and the 1934 Act.
UAM Funds Complex includes UAM Funds, Inc., UAM Funds Trust, UAM Funds
Inc. II and all of their portfolios.
UAM is United Asset Management Corporation.
UAMFDI is UAM Fund Distributors, Inc., the Fund's distributor.
UAMFSI is UAM Fund Services, Inc., the Fund's administrator.
UAMSSC is UAM Fund Shareholder Servicing Center, the Fund's sub-
shareholder-servicing agent.
All terms that this SAI does not otherwise define, have the same
meaning in the SAI as they do in the prospectus(es) of the portfolios.
II-2
<PAGE>
Appendix A: Description of Securities and Ratings
II-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, CCC Preferred stock rated BB, B, and CCC are regarded, 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 quality,
minus (-) 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.
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.
A-4
<PAGE>
C A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not
made on the date due even if the applicable grace period has not
expired, unless Standard & Poors' believes that such payments
will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
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.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
A-5
<PAGE>
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
A-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.
B-2
<PAGE>
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.
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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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-5
<PAGE>
PART C
UAM FUNDS TRUST
OTHER INFORMATION
ITEM 23. EXHIBITS
Exhibits previously filed by the Fund are incorporated by reference to such
filings. The following table describes the location of all exhibits. In the
table, the following references are used: PEA 30 = Post-Effective Amendment No.
30 filed on April 22, 1999, PEA 29 = Post-Effective Amendment No. 29 filed on
April 12, 1999, PEA 27 = Post-Effective Amendment No. 27 filed on February 5,
1999, PEA 24 = Post Effective Amendment No. 24 filed on July 10, 1998; PEA 19 =
Post-Effective Amendment No. 19 filed on February 3, 1998; PEA17 = Post-
Effective Amendment No. 17 filed on December 15, 1997, PEA16 = Post-Effective
Amendment No. 16 filed on July 10, 1997.
<TABLE>
<CAPTION>
Exhibit Incorporated by
Reference to
(Location):
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
A.1. Agreement and Declaration of Trust PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
2. Certificate of Trust PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
3. Certificate of Amendment to Certificate of Trust PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
B.1. By-Laws PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
2. Amendment to By-Laws dated December 10, 1998 PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
C.1. Form of Specimen Share Certificate PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
2. The rights of security holders are defined in the Registrant's Agreement and Declaration of PEA 24
Trust and By-Laws
- ---------------------------------------------------------------------------------------------------------------------------
D.1. Investment Advisory Agreement between Registrant and Barrow, Hanley, Mewhinney & Strauss PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
2. Investment Advisory Agreement between Registrant and Cambiar Investors, Inc. PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
3. Investment Advisory Agreement between Registrant and Chicago Asset Management Company PEA 27
(Intermediate Bond Portfolio)
- ---------------------------------------------------------------------------------------------------------------------------
4. Investment Advisory Agreement between Registrant and Chicago Asset Management Company PEA 27
(Value/Contrarian Portfolio)
- ---------------------------------------------------------------------------------------------------------------------------
5. Investment Advisory Agreement between Registrant and Dwight Asset Management Company PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
6. Investment Advisory Agreement between Registrant and First Pacific Advisors, Inc. PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
7. Investment Advisory Agreement between Registrant and Hanson Investment Management Company PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
8. Investment Advisory Agreement between Registrant and Heitman/PRA Securities Advisors, Inc. PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
9. Investment Advisory Agreement between Registrant and Jacobs Asset Management, L.P. PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
10. Investment Advisory Agreement between Registrant and Murray Johnstone International Limited PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
11. Investment Advisory Agreement between Registrant and Pacific Financial Research, Inc. PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
12. Investment Advisory Agreement between Registrant and Pell Rudman Trust Company, N.A. PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
13. Investment Advisory Agreement between Registrant and Tom Johnson Investment Management PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
E.1. Distribution Agreement between Registrant and UAM Fund Distributors PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
2. Distribution Agreement between Registrant and UAM Fund Distributors, Inc. dated as of March PEA 29
31, 1999 (Advisor Class Shares)
- ---------------------------------------------------------------------------------------------------------------------------
2. Distribution Agreement between Registrant and ACG Capital Corporation (Advisor Class Shares) PEA 19
- ---------------------------------------------------------------------------------------------------------------------------
4. Amendment to Distribution Agreement between Registrant and ACG Capital Corporation dated as PEA 29
of March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
5. Selling Dealer Agreement PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
F. Trustees' and Officers' Contracts and Programs Not applicable
- ---------------------------------------------------------------------------------------------------------------------------
G.1. Global Custody Agreement PEA 16
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
H.1. Fund Administration Agreement PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
Fund Administration Agreement Fee Schedule PEA 30
- ---------------------------------------------------------------------------------------------------------------------------
2. Mutual Funds Service Agreement PEA 16
- ---------------------------------------------------------------------------------------------------------------------------
I. Opinions and Consents of Counsel To be filed by
amendment.
- ---------------------------------------------------------------------------------------------------------------------------
J. Consent of Independent Auditors To be filed by
amendment.
- ---------------------------------------------------------------------------------------------------------------------------
K. Other Financial Statements Not applicable
- ---------------------------------------------------------------------------------------------------------------------------
L. Purchase Agreement PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
M.1. Distribution Plan PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
2. Shareholder Services Plan PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
3. Service Agreement PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
N. Financial Data Schedule Not applicable
- ---------------------------------------------------------------------------------------------------------------------------
O. Amended and Restated Rule 18f-3 Multiple Class Plan PEA 24
- ---------------------------------------------------------------------------------------------------------------------------
P. Powers of Attorney PEA 24, PEA 27
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Not applicable.
ITEM 25. INDEMNIFICATION
Reference is made to Article VI of Registrant's Declaration of Trust, which is
incorporated herein by reference. Registrant hereby also makes the undertaking
consistent with Rule 484 under the Securities Act of 1933, as amended. Insofar
as indemnification for liability arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Provisions for indemnification of UAM Fund Services, Inc. are contained in
Section 6 of its Fund Administration Agreement with the Registrant.
Provisions for indemnification of the Registrant's investment advisers are
contained in Section 7 of their respective Investment Advisory Agreements with
the Registrant.
Provisions for indemnification of Registrant's principal underwriter, UAM Fund
Distributors, Inc., are contained in its Distribution Agreement with the
Registrant.
Provisions for indemnification of Registrant's custodian, The Chase Manhattan
Bank, are contained in Section 12 of its Fund Global Custody Agreement with the
Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Adviser" in the Prospectuses
constituting Part A of this Registration Statement and "Investment Adviser" in
Part B of this Registration Statement. Except for information with respect to
Pell Rudman Trust Company, N.A., the information required by this Item 26 with
respect to each director, officer, or partner of each other investment adviser
of the Registrant is incorporated by reference to the Forms ADV filed by the
investment advisers listed below with the Securities and Exchange Commission
pursuant to the Investment Advisers Act of 1940, as amended, under the file
numbers indicated:
Investment Adviser File No.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Barrow, Hanley, Mewhinney & Strauss, Inc. 801-31237
- -----------------------------------------------------------------------------------------------------------------------------
Cambiar Investors, Inc. 801-09538
- -----------------------------------------------------------------------------------------------------------------------------
Chicago Asset Management Company 801-20197
- -----------------------------------------------------------------------------------------------------------------------------
Dwight Asset Management Company 801-45304
- -----------------------------------------------------------------------------------------------------------------------------
First Pacific Advisors, Inc. 801-39512
- -----------------------------------------------------------------------------------------------------------------------------
Hanson Investment Management Company 801-14817
- -----------------------------------------------------------------------------------------------------------------------------
Heitman/PRA Securities Advisors, Inc. 801-48252
- -----------------------------------------------------------------------------------------------------------------------------
Jacobs Asset Management, L.P. 801-49790
- -----------------------------------------------------------------------------------------------------------------------------
Murray Johnstone International Ltd. 801-34926
- -----------------------------------------------------------------------------------------------------------------------------
Pacific Financial Research, Inc. 801-54352
- -----------------------------------------------------------------------------------------------------------------------------
Tom Johnson Investment Management, Inc. 801-42549
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Name and Principal Business Address Positions and Offices with Pell Rudman Trust Positions and Offices with Pell
Company, N.A. Rudman & Co., Inc.
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jeffrey S. Thomas Director Chief Financial Officer of
100 Federal Street Pell, Rudman & Co., Inc.
Boston, Massachusetts
- -------------------------------------------------------------------------------------------------------------------------------
Edward I. Rudman Director Chairman and President of Pell,
100 Federal Street Rudman & Co., Inc.
Boston, Massachusetts
- -------------------------------------------------------------------------------------------------------------------------------
James S. McDonald Director Executive Vice President of
100 Federal Street Pell, Rudman & Co., Inc.
Boston, Massachusetts
- -------------------------------------------------------------------------------------------------------------------------------
Susan W. Hunnewell Director Senior Vice President of Pell,
100 Federal Street Rudman & Co., Inc.
Boston, Massachusetts
</TABLE>
Barrow, Hanley, Mewhinney & Strauss, Inc., Cambiar Investors, Inc., Chicago
Asset Management Company, Dwight Asset Management Company, First Pacific
Advisors, Inc., Hanson Investment Management Company, Heitman/PRA Securities
Advisors, Inc., Jacobs Asset Management, L.P., Murray Johnstone International
Ltd., Pacific Financial Research, Inc., Pell Rudman Trust Company, N.A., and Tom
Johnson Investment Management, Inc., are affiliates of United Asset Management
Corporation ("UAM"), a Delaware corporation owning firms engaged primarily in
institutional investment management.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) UAM Fund Distributors, Inc. acts as distributor of the registrant's
shares. ACG Capital Corporation also acts as distributor of the Heitman Real
Estate Portfolio Advisor Class Shares.
(b) The information required with respect to each director and officer of UAM
Fund Distributors, Inc. is incorporated by reference to Schedule A of Form BD
filed pursuant to the Securities and Exchange Act of 1934 (SEC File No. 8-
41126).
(c) The information required with respect to each Director and officer of ACG
Capital Corporation is incorporated by reference to Schedule A of Form BD
filed pursuant to the Securities and Exchange Act of 1934 (SEC File No. 8-
47813).
(d) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, and the Rules promulgated thereunder, are
maintained as follows:
<TABLE>
<CAPTION>
<S> <C>
Name and Address of Service Provider Relationship with Registrant
- -------------------------------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank Custodian bank
4 Chase MetroTech Center
Brooklyn, New York, 11245
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Chase Global Funds Services Company Sub-administrator
73 Tremont Street
Boston, Massachusetts 02108
- -------------------------------------------------------------------------------------------------------------------------------
UAM Fund Services, Inc. Administrator
211 Congress Street, 4th Floor
Boston, Massachusetts 02110
UAM Shareholder Services Center, Inc. Sub-shareholder servicing agent
825 Duportail Road
Wayne, PA 19087
- -------------------------------------------------------------------------------------------------------------------------------
DST Systems, Inc. Sub-transfer agent
210 West 10th Street
Kansas City, Missouri 64105
</TABLE>
The registrant's investment advisers will also maintain physical possession of
certain of the books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Fund has duly caused this registration statement to be signed on its
behalf by the undersigned, duly authorized, in the City of Boston, and State of
Massachusetts on the 18th day of May 1999.
UAM FUNDS TRUST
/s/ Michael E. DeFao
--------------------
Michael E. DeFao
Secretary
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the 18th day of May, 1999:
*
______________________________
Norton H. Reamer, Chairman and
President
*
______________________________
John T. Bennett, Jr., Trustee
*
___________________________
Nancy J. Dunn, Trustee
*
___________________________
Philip D. English, Trustee
*
___________________________
William A. Humenuk, Trustee
*
______________________________
Peter M. Whitman, Jr., Trustee
*
___________________________
James P. Pappas, Trustee
/s/ Gary L. French
- ------------------
Gary L. French, Treasurer
/s/ Michael E. DeFao
- --------------------
* Michael E. DeFao
(Attorney-in-Fact)