As filed with the Securities and Exchange
Commission on August 7, 1998
Registration No. 333-10015
File No. 811-07763
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 4 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 6 [X]
MASTERS' SELECT FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
4 ORINDA WAY, SUITE 230-D
ORINDA, CA 94563
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 254-8999
KENNETH E. GREGORY
4 Orinda Way, Suite 230-D
Orinda, CA 94563
(Name and Address of Agent for Service)
Copy to:
Julie Allecta, Esq.
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, CA 94104
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b)
[ ] On _____________, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On _____________, pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On _____________, pursuant to paragraph (a)(2) of Rule 485
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 495 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A and
B of Form N-1A).
<TABLE>
<CAPTION>
Caption or Subheading in Prospectus or
Item No. on Form N-1A Statement of Additional Information
--------------------- -----------------------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis The Fund At A Glance; Expenses
3. Condensed Financial Information Performance
4. General Description of Registrant Cover Page; The Fund in Detail: Organization,
Fundamental Policies and Investment Restrictions,
Investment Philosophy
5. Management of the Fund The Fund in Detail: Management, Investment
Managers, Breakdown of Expenses, Organization
6. Capital Stock and Other Securities Dividends, Capital Gains, and Taxes; General
Information
7. Purchase of Securities Being Offered Your Account: Ways to Set Up Your Account,
How to Buy Shares
8. Redemption or Repurchase Your Account: How to Sell Shares
9. Legal Proceedings Not Applicable
</TABLE>
<PAGE>
PART B-INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Caption or Subheading in Prospectus or
Item No. on Form N-1A Statement of Additional Information
--------------------- -----------------------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Objectives and Policies
14. Management of the Fund Management
15. Control Persons and Principal Holders of General Information
Securities
16. Investment Advisory and Other Services Management; General Information
17. Brokerage Allocation and Other Policies Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities General Information
19. Purchase, Redemption and Pricing Net Asset Value
of Securities Being Offered
20. Tax Status Taxation
21. Underwriters Not Applicable
22. Calculation of Performance Data Performance
23. Financial Statements Not Applicable
</TABLE>
<PAGE>
As filed with the Securities and
Exchange Commission on August 7, 1998
Registration No. 333-10015
File No. 811-07763
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Part A
of
Form N-1A
COMBINED REGISTRATION STATEMENT
MASTERS' SELECT FUNDS TRUST
---------------------------
Masters' Select Equity Fund
Masters' Select International Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The Masters' Select Equity Fund
Supplement Dated August 7, 1998
to Prospectus Dated November 15, 1997
The following information should be inserted on page 5 of the prospectus:
FINANCIAL HIGHLIGHTS
for a share outstanding throughout the period
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Masters' Select Masters' Select
Equity Fund Equity Fund
For the period from For the period from
12/31/96 to 12/31/97(1) 1/1/98 to 6/30/98(unaudited)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period ............... $ 10.00 $ 11.84
----------- -----------
Income from investment operations:
Net investment income ..................... 0.03 0.04
Net realized and unrealized gain .......... 2.90 1.63
----------- -----------
Total from investment operations .......... 2.93 1.67
----------- -----------
Less distributions:
From net investment income ................ (0.03) --
From net realized gains ................... (1.06) --
----------- -----------
Total distributions ....................... (1.09) --
=========== ===========
Net asset value, end of period ..................... $ 11.84 $ 13.51
=========== ===========
Total return(2) .................................... 29.11% 14.10%
=========== ===========
Net assets at end of period (in 000's) ............. $ 296,876 $ 407,853
=========== ===========
Ratio of expenses to average net assets(3) ......... 1.47% 1.37%*
=========== ===========
Ratio of net investment income to average net assets 0.12% 0.13%*
=========== ===========
Portfolio turnover rate ............................ 145.11% 45.48%
=========== ===========
</TABLE>
*Annualized.
(1) The Masters' Select Equity Fund commenced operations on December 31, 1996.
(2) Not annualized for periods less than one year.
(3) Includes custody fees paid indirectly which amount to 0.03% and 0.00%,
respectively, of average net assets for the fiscal year ended December 31,
1997 and the six month period ended June 30, 1998.
The information above for the period from December 31, 1996 to December 31, 1997
has been audited by McGladrey & Pullen, LLP, independent certified public
accountants whose unqualified report for the same period is incorporated by
reference herein and appears in the annual report to shareholders. This
information should be read in conjunction with the financial statements and
accompanying notes thereto which appear in the annual report. Further
information about the Fund's performance is included in the annual report which
may be obtained without charge by writing or calling the address or telephone
number on the Prospectus cover page.
<PAGE>
The Masters' Select International Fund
Supplement Dated August 7, 1998
to Prospectus Dated November 15, 1997
The following information should be inserted on page 5 of the prospectus:
FINANCIAL HIGHLIGHTS
for a share outstanding throughout the period
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Masters' Select Masters' Select
International Fund International Fund
For the period from For the period from
12/1/97 to 12/31/97(1) 1/1/98 to 6/30/98(unaudited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period ............... $ 10.00 $ 9.88
----------- -----------
Income from investment operations:
Net investment income ..................... 0.00 0.07
Net realized and unrealized gain (loss) ... (0.12) 1.41
----------- -----------
Total from investment operations .......... (0.12) 1.48
----------- -----------
Less distributions:
From net investment income ................ -- --
From net realized gains ................... -- --
----------- -----------
Total distributions ....................... -- --
=========== ===========
Net asset value, end of period ..................... $ 9.88 $ 11.36
=========== ===========
Total return(2) .................................... (1.20)% 14.98%
=========== ===========
Net assets at end of period (in 000's) ............. $ 45,934 $ 103,996
=========== ===========
Ratio of expenses to average net assets
Before expense reimbursement and waiver ... 1.77%* 1.59%*
After expense reimbursement and waiver(3) . 1.77%* 1.52%*
Ratio of net investment income to average net assets
Before expense reimbursement and waiver ... 0.42%* 1.64%*
After expense reimbursement and waiver .... 0.42%* 1.57%*
Portfolio turnover rate ............................ 0.00% 22.81%
=========== ===========
</TABLE>
*Annualized.
(1) The Masters' Select International Fund commenced operations on December 1,
1997.
(2) Not annualized for periods less than one year.
(3) Includes custody fees paid indirectly which amount to 0.06% and 0.01%,
respectively, of average net assets for the fiscal year ended December 31,
1997 and the six month period ended June 30, 1998.
The information above for the period from December 1, 1997 to December 31, 1997
has been audited by McGladrey & Pullen, LLP, independent certified public
accountants whose unqualified report for the same period is incorporated by
reference herein and appears in the annual report to shareholders. This
information should be read in conjunction with the financial statements and
accompanying notes thereto which appear in the annual report. Further
information about the Fund's performance is included in the annual report which
may be obtained without charge by writing or calling the address or telephone
number on the Prospectus cover page.
<PAGE>
As filed with the Securities and
Exchange Commission on August 7, 1998
Registration No. 333-10015
File No. 811-07763
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Part B
of
Form N-1A
COMBINED REGISTRATION STATEMENT
MASTERS' SELECT FUNDS TRUST
---------------------------
Masters' Select Equity Fund
Masters' Select International Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MASTERS' SELECT FUNDS TRUST
Statement of Additional Information
Dated November 15, 1997
as Supplemented August 7, 1998
------------------------------
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated November 15, 1997, as it may be
amended from time to time, of The Masters' Select Equity Fund (the "Masters'
Select Equity" or "Equity Fund") and The Masters' Select International Fund (the
"Masters' Select International" or "International Fund"), a series of Masters'
Select Funds Trust (the "Trust"), formerly known as the Masters' Select
Investment Trust. Litman/Gregory Fund Advisors, LLC (the "Advisor") is the
Advisor of the Funds. The Advisor has retained investment managers as
sub-advisers ("Managers"), each responsible for portfolio management of a
segment of each Fund's total assets. A copy of the combined prospectus may be
obtained from the Trust at 4 Orinda Way, Suite 230-D, Orinda, California 94563,
Telephone (510) 254-8999.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference to sections
Page in the prospectus
---- -----------------
<S> <C> <C>
Investment Objective and Policies.................... B-4 The Fund at a Glance; The Fund in
Detail
Management........................................... B-21 The Fund in Detail: Management,
Investment Managers, Breakdown of
Expenses, Organization
Portfolio Transactions and Brokerage................. B-24 The Fund in Detail: Investment
Managers
Net Asset Value...................................... B-25 Your Account: How to Buy Shares
Taxation ........................................... B-26 Taxes
Dividends and Distributions.......................... B-28 Dividends, Capital Gains, and Taxes
Performance Information.............................. B-29 Performance
General Information.................................. B-30 General Information
Appendix............................................. B-30 Not applicable
Statement of Assets and Liabilities.................. B-31 Not applicable
Notes to Statement of Assets and Liabilities......... B-31 Not applicable
</TABLE>
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide long-term growth of
capital. There is no assurance that each Fund will achieve its objective. The
discussion below supplements information contained in the prospectus as to
investment policies of each Fund.
Convertible Securities and Warrants
Each Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security (a debt instrument or a
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of a Fund's
entire investment therein).
Other Corporate Debt Securities
Each Fund may invest in non-convertible debt securities of foreign and
domestic companies over a cross-section of industries. The debt securities in
which each Fund may invest will be of varying maturities and may include
corporate bonds, debentures, notes and other similar corporate debt instruments.
The value of a longer-term debt security fluctuates more widely in response to
changes in interest rates than do shorter-term debt securities.
Risks of Investing in Debt Securities
There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue.
Debt securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with short maturities and lower yields. The market
prices of debt securities usually vary, depending upon available yields. An
increase in interest rates will generally reduce the value of such portfolio
investments, and a decline in interest rates will generally increase the value
of such portfolio investments. The ability of each Fund to achieve its
investment objective also depends on the continuing ability of the issuers of
the debt securities in which each Fund invests to meet their obligations for the
payment of interest and principal when due.
Risks of Investing in Lower-Rated Debt Securities
As set forth in the prospectus, each Fund may invest a portion of its
net assets in debt securities rated below "Baa" by Moody's or "BBB" by S&P or
below investment grade by other recognized rating agencies, or in unrated
securities of comparable quality under certain circumstances. Securities with
ratings below "Baa" and/or "BBB" are commonly referred to as "junk bonds." Such
bonds are subject to greater market fluctuations and risk of loss of income and
principal than higher rated bonds for a variety of reasons, including the
following:
B-2
<PAGE>
Sensitivity to Interest Rate and Economic Changes. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, each Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and a Fund's asset
values.
Payment Expectations. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of a Fund's assets. If a Fund experiences unexpected net redemptions, it
may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which a Fund's expenses can be
spread and possibly reducing a Fund's rate of return.
Liquidity and Valuation. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and this
may impact a Manager's ability to accurately value high yield bonds and a Fund's
assets and hinder a Fund's ability to dispose of the bonds. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield bonds, especially in a thinly
traded market.
Credit Ratings. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. Also, since
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, a Manager must monitor the issuers of high yield bonds in a
Fund's portfolio to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments, and to assure the
bonds' liquidity so a Fund can meet redemption requests. A Fund will not
necessarily dispose of a portfolio security when its rating has been changed.
Short-Term Investments
Each Fund may invest in any of the following securities and
instruments:
Bank Certificates or Deposit, Bankers' Acceptances and Time Deposits.
Each Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by a Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If a Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the
B-3
<PAGE>
profitability of the banking industry depends largely upon the availability and
cost of funds for the purpose of financing lending operations under prevailing
money market conditions. General economic conditions as well as exposure to
credit losses arising from possible financial difficulties of borrowers play an
important part in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that a Fund
may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectus, a Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
Savings Association Obligations. Each Fund may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in excess
of $100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
Commercial Paper, Short-Term Notes and Other Corporate Obligations.
Each Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by a Manager to be of comparable
quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, a Fund may purchase
corporate obligations which have remaining maturities of one year or less from
the date of purchase and which are rated "AA" or higher by S&P or "Aa" or higher
by Moody's.
Money Market Funds
Each Fund may under certain circumstances invest a portion of its
assets in money market funds. The Investment Company Act of 1940 (the "1940
Act") prohibits a Fund from investing more than 5% of the value of its total
assets in any one investment company. or more than 10% of the value of its total
assets in investment companies as a group, and also restricts its investment in
any investment company to 3% of the voting securities of such investment
company. The Advisor and the Managers will not impose advisory fees on assets of
a Fund invested in a money market mutual fund. However, an investment in a money
market mutual fund will involve payment by a Fund of its pro rata share of
advisory and administrative fees charged by such fund.
Government Obligations
Each Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of
B-4
<PAGE>
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
Each Fund may invest in sovereign debt obligations of foreign
countries. A sovereign debtor's willingness or ability to repay principal and
interest in a timely manner may be affected by a number of factors, including
its cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which it
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitments on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to meet such conditions could result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debt in a timely
manner.
Zero Coupon Securities
Each Fund may invest up to 35% of its net assets in zero coupon
securities issued by the U.S. Treasury. Zero coupon Treasury securities are U.S.
Treasury notes and bonds which have been stripped of their unmatured interest
coupons and receipts, or certificates representing interests in such stripped
debt obligations or coupons. Because a zero coupon security pays no interest to
its holder during its life or for a substantial period of time, it usually
trades at a deep discount from its face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest.
Variable and Floating Rate Instruments
Each Fund may acquire variable and floating rate instruments. Such
instruments are frequently not rated by credit rating agencies; however, unrated
variable and floating rate instruments purchased by a Fund will be determined by
a Manager under guidelines established by the Trust's Board of Trustees to be of
comparable quality at the time of the purchase to rated instruments eligible for
purchase by a Fund. In making such determinations, a Manager will consider the
earning power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will monitor their financial condition. An active secondary
market may not exist with respect to particular variable or floating rate
instruments purchased by a Fund. The absence of such an active secondary market
could make it difficult for a Fund to dispose of the variable or floating rate
instrument involved in the event of the issuer of the instrument defaulting on
its payment obligation or during periods in which a Fund is not entitled to
exercise its demand rights, and a Fund could, for these or other reasons, suffer
a loss to the extent of the default. Variable and floating rate instruments may
be secured by bank letters of credit.
Mortgage-Related Securities
Each Fund may invest in mortgage-related securities. Mortgage-related
securities are derivative interests in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. Each Fund may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. Mortgage Pass-Through Securities. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of
B-5
<PAGE>
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as "modified
pass-throughs." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is GNMA, a wholly owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/services
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
FHLMC is a government-sponsored corporation created to increase availability of
mortgage credit for residential housing and owned entirely by private
stockholders. FHLMC issues participation certificates which represent interests
in conventional mortgages from FHLMC's national portfolio. Pass-through
securities issued by FNMA and participation certificates issued by FHLMC are
guaranteed as to timely payment of principal and interest by FNMA and FHLMC,
respectively, but are not backed by the full faith and credit of the United
States Government.
Although the underlying mortgage loans in a pool may have maturities of
up to 30 years, the actual average life of the pool certificates typically will
be substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
Collateralized Mortgage Obligations ("CMOs"). A domestic or foreign CMO
in which a Fund may invest is a hybrid between a mortgage-backed bond and a
mortgage pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
Foreign Investments and Currencies
Each Fund may invest in securities of foreign issuers that are not
publicly traded in the United States (the International Fund will invest
substantially all of its assets in securities of foreign issuers). Each Fund may
also invest in depositary receipts and in foreign currency futures contracts and
may purchase and sell foreign currency on a spot basis.
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Depositary Receipts. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
Risks of Investing in Foreign Securities. Investments in foreign
securities involve certain inherent risks, including the following:
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
Currency Fluctuations. Each Fund may invest in securities denominated
in foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of a Fund's assets denominated in that currency. Such changes will also
affect a Fund's income. The value of a Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
Market Characteristics. The Managers expect that many foreign
securities in which a Fund invests will be purchased in over-the-counter markets
or on exchanges located in the countries in which the principal offices of the
issuers of the various securities are located, if that is the best available
market. Foreign exchanges and markets may be more volatile than those in the
United States. While growing in volume, they usually have substantially less
volume than U.S. markets, and a Fund's portfolio securities may be less liquid
and more volatile than U.S. Government securities. Moreover, settlement
practices for transactions in foreign markets may differ from those in United
States markets, and may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving securities
settlement where Fund assets may be released prior to receipt of payment or
securities, may expose a Fund to increased risk in the event of a failed trade
or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of a
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
Legal and Regulatory Matters. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
Taxes. The interest payable on certain of a Fund's foreign portfolio
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to a Fund's shareholders.
Costs. To the extent that each Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
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Emerging markets. Some of the securities in which each Fund may invest
may be located in developing or emerging markets, which entail additional risks,
including less social, political and economic stability; smaller securities
markets and lower trading volume, which may result in a less liquidity and
greater price volatility; national policies that may restrict a Fund's
investment opportunities, including restrictions on investment in issuers or
industries, or expropriation or confiscation of assets or property; and less
developed legal structures governing private or foreign investment.
In considering whether to invest in the securities of a foreign
company, a Manager considers such factors as the characteristics of the
particular company, differences between economic trends and the performance of
securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund will be invested in foreign companies and countries and depository receipts
will fluctuate from time to time within the limitations described in the
prospectus, depending on a Manager's assessment of prevailing market, economic
and other conditions.
Options on Securities and Securities Indices
Purchasing Put and Call Options. Each Fund may purchase covered "put"
and "call" options with respect to securities which are otherwise eligible for
purchase by a Fund and with respect to various stock indices subject to certain
restrictions. Each Fund will engage in trading of such derivative securities
primarily for hedging purposes.
If a Fund purchases a put option, a Fund acquires the right to sell the
underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when a Manager perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If a Fund is
holding a stock which it feels has strong fundamentals, but for some reason may
be weak in the near term, a Fund may purchase a put option on such security,
thereby giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, a Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the underlying
security on the date a Fund exercises the put, less transaction costs, will be
the amount by which a Fund will be able to hedge against a decline in the
underlying security. If during the period of the option the market price for the
underlying security remains at or above the put's strike price, the put will
expire worthless, representing a loss of the price a Fund paid for the put, plus
transaction costs. If the price of the underlying security increases, the profit
a Fund realizes on the sale of the security will be reduced by the premium paid
for the put option less any amount for which the put may be sold.
If a Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if a Fund has a short position in the underlying
security and the security thereafter increases in price. Each Fund will exercise
a call option only if the price of the underlying security is above the strike
price at the time of exercise. If during the option period the market price for
the underlying security remains at or below the strike price of the call option,
the option will expire worthless, representing a loss of the price paid for the
option, plus transaction costs. If the call option has been purchased to hedge a
short position of a Fund in the underlying security and the price of the
underlying security thereafter falls, the profit a Fund realizes on the cover of
the short position in the security will be reduced by the premium paid for the
call option less any amount for which such option may be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. Each Fund generally will purchase only those options for which a
Manager believes there is an active secondary market to facilitate closing
transactions.
Writing Call Options. Each Fund may write covered call options. A call
option is "covered" if a Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash
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consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by the
Custodian). The writer of a call option receives a premium and gives the
purchaser the right to buy the security underlying the option at the exercise
price. The writer has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. If the writer of an exchange-traded option wishes to terminate his
obligation, he may effect a "closing purchase transaction." This is accomplished
by buying an option of the same series as the option previously written. A
writer may not effect a closing purchase transaction after it has been notified
of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction will permit the cash or proceeds from the concurrent sale of
any securities subject to the option to be used for other investments of a Fund.
If a Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
Each Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. Each Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to a Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by a Fund.
Stock Index Options. Each Fund may also purchase put and call options
with respect to the S&P 500 and other stock indices. Such options may be
purchased as a hedge against changes resulting from market conditions in the
values of securities which are held in a Fund's portfolio or which it intends to
purchase or sell, or when they are economically appropriate for the reduction of
risks inherent in the ongoing management of a Fund.
The distinctive characteristics of options on stock indices create
certain risks that are not present with stock options generally. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether a Fund will realize a gain or loss
on the purchase or sale of an option on an index depends upon movements in the
level of stock prices in the stock market generally rather than movements in the
price of a particular stock. Accordingly, successful use by a Fund of options on
a stock index would be subject to a Manager's ability to predict correctly
movements in the direction of the stock market generally. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, a Fund would not be able to
close out options which it had purchased, and if restrictions on exercise were
imposed, a Fund might be unable to exercise an option it holds, which could
result in substantial losses to a Fund. It is the policy of each Fund to
purchase put or call options only with respect to an index which a Manager
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
Risks Of Investing in Options. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of option of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all
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times be adequate to handle current trading volume; or one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which a Fund may enter into options transactions may be limited by the
Internal Revenue Code (the "Code") requirements for qualification of a Fund as a
regulated investment company. See "Dividends and Distributions" and "Taxation."
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in United States option exchanges will not
be available. For example, there may be no daily price fluctuation limits in
such exchanges or markets, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, a Fund as an option writer
could lose amounts substantially in excess of its initial investment, due to the
margin and collateral requirements typically associated with such option
writing. See "Dealer Options" below.
Dealer Options. Each Fund will engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to dealer
options. While a Fund might look to a clearing corporation to exercise
exchange-traded options, if a Fund were to purchase a dealer option it would
need to rely on the dealer from which it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by a Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, a Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when a Fund writes a dealer
option, a Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom a Fund originally wrote the option. While a Fund will seek to enter into
dealer options only with dealers who will agree to and which are expected to be
capable of entering into closing transactions with a Fund, there can be no
assurance that a Fund will at any time be able to liquidate a dealer option at a
favorable price at any time prior to expiration. Unless a Fund, as a covered
dealer call option writer, is able to effect a closing purchase transaction, it
will not be able to liquidate securities (or other assets) used as cover until
the option expires or is exercised. In the event of insolvency of the other
party, a Fund may be unable to liquidate a dealer option. With respect to
options written by a Fund, the inability to enter into a closing transaction may
result in material losses to a Fund. For example, because a Fund must maintain a
secured position with respect to any call option on a security it writes, a Fund
may not sell the assets which it has segregated to secure the position while it
is obligated under the option. This requirement may impair a Fund's ability to
sell portfolio securities at a time when such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities. A
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that a Fund may repurchase the dealer option it has written for a maximum
price to be calculated by a predetermined formula. In such cases, the dealer
option would be considered illiquid only to the extent the maximum purchase
price under the formula exceeds the intrinsic value of the option. Accordingly,
each Fund will treat dealer options as subject to a Fund's limitation on
illiquid securities. If the Commission changes its position on the liquidity of
dealer options, each Fund will change its treatment of such instruments
accordingly.
Foreign Currency Options. Each Fund may buy or sell put and call
options on foreign currencies. A put or call option on a foreign currency gives
the purchaser of the option the right to sell or purchase a foreign currency at
the exercise price until the option expires. Each Fund will use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option
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collar. An option collar involves the purchase of a put option and the
simultaneous sale of call option on the same currency with the same expiration
date but with different exercise (or "strike") prices. Generally, the put option
will have an out-of-the-money strike price, while the call option will have
either an at-the-money strike price or an in-the-money strike price. Foreign
currency options are derivative securities. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Fund to reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received. Each Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations: however, in the event of exchange rate
movements adverse to a Fund's position, a Fund may forfeit the entire amount of
the premium plus related transaction costs.
Spread Transactions. Each Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a Fund
the right to put a securities that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that a Fund does not own, but
which is used as a benchmark. The risk to a Fund, in addition to the risks of
dealer options described above, is the cost of the premium paid as well as any
transaction costs. The purchase of spread options will be used to protect a Fund
against adverse changes in prevailing credit quality spreads, i.e., the yield
spread between high quality and lower quality securities. This protection is
provided only during the life of the spread options.
Forward Currency Contracts
Each Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. For example, a Fund might purchase a
particular currency or enter into a forward currency contract to preserve the
U.S. dollar price of securities it intends to or has contracted to purchase.
Alternatively, it might sell a particular currency on either a spot or forward
basis to hedge against an anticipated decline in the dollar value of securities
it intends to or has contracted to sell. Although this strategy could minimize
the risk of loss due to a decline in the value of the hedged currency, it could
also limit any potential gain from an increase in the value of the currency.
Futures Contracts and Related Options
Each Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates. A
Fund will trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). A Fund will segregate liquid assets in a separate account
with its Custodian when required to do so by CFTC guidelines in order to cover
its obligation in connection with futures and options transactions.
No price is paid or received by a Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, a Fund will
be required to deposit in a segregated account with its Custodian an amount of
cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin. The margin requirements for foreign
futures contracts may be different.
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The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to a Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when a
Fund has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
a Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when a Fund has purchased a stock index futures
contract and the price of the underlying stock index has declined, the position
will be less valuable and a Fund will be required to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, a Fund may elect
to close the position by taking an opposite position, which will operate to
terminate a Fund's position in the futures contract A final determination of
variation margin is made on closing the position. Additional cash is paid by or
released to a Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation
margin, a Fund must segregate liquid assets with its custodian equal to the
market value of the futures contracts, in order to comply with Commission
requirements intended to ensure that a Fund's use of futures is unleveraged. The
requirements for margin payments and segregated accounts apply to both domestic
and foreign futures contracts.
Stock Index Futures Contracts. Each Fund may invest in futures
contracts on stock indices. Currently, stock index futures contracts can be
purchased or sold with respect to the S&P 500 Stock Price Index on the Chicago
Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the
New York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index on the Kansas City Board of Trade. Foreign financial and
stock index futures are traded on foreign exchanges including the London
International Financial Futures Exchange, the Singapore International Monetary
Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock Exchange.
Interest Rate or Financial Futures Contracts. Each Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures contract by a Fund
would create an obligation by a Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for a
specified price. A futures contract purchased by a Fund would create an
obligation by a Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, a Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, a Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by a Fund's entering into
a futures contract sale. If the offsetting sale price exceeds
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the purchase price, a Fund realizes a gain, and if the purchase price exceeds
the offsetting sale price, a Fund realizes a loss.
Each Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; GNMA modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and 90-day
commercial paper. Each Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments. International interest rate futures contracts are traded on the
London International Financial Futures Exchange, the Singapore International
Monetary Exchange, the Sydney Futures Exchange Limited and the Tokyo Stock
Exchange.
Foreign Currency Futures Contracts. Each Fund may use foreign currency
future contracts for hedging purposes. A foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a foreign currency at a specified price and time. A public
market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("ECU"). Other foreign currency
futures contracts are likely to be developed and traded in the future. Each Fund
will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
Risks of Transactions in Futures Contracts. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, a Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, a Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, a Fund may buy or sell fewer futures
contracts if the historical volatility of the price of the securities being
hedged is less than the historical volatility of the futures contract being
used. It is possible that, when a Fund has sold futures to hedge its portfolio
against a decline in the market, the market may advance while the value of
securities held in a Fund's portfolio may decline. If this occurs, a Fund will
lose money on the future and also experience a decline in value in its portfolio
securities. However, the Advisor believes that over time the value of a
diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If a Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
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requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by a Manager may still not result in a
successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although a Fund may
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund is also subject to a Manager's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting stocks held in its portfolio and stock prices increase
instead, a Fund will lose part or all of the benefit of the increased value of
the stocks which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if a Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. Each Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund engages
in transactions in futures contracts or options, a Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
Options on Futures Contracts. As described above, each Fund may
purchase options on the futures contracts they can purchase or sell. A futures
option gives the holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the
B-14
<PAGE>
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Fund because the maximum amount at risk is limited to the
premium paid for the options (plus transaction costs).
Restrictions on the Use or Futures Contracts and Related Options. Each
Fund will engage in transactions in futures contracts or related options
primarily as a hedge against changes resulting from market conditions in the
values of securities held in a Fund's portfolio or which it intends to purchase
and where the transactions are economically appropriate to the reduction of
risks inherent in the ongoing management of each Fund. A Fund may not purchase
or sell futures or purchase related options if, immediately thereafter, more
than 25% of its net assets would be hedged. A Fund also may not purchase or sell
futures or purchase related options if, immediately thereafter, the sum of the
amount of margin deposits on a Fund's existing futures positions and premiums
paid for such options would exceed 5% of the market value of a Fund's net
assets.
These restrictions, which are derived from current federal regulations
regarding the use of options and futures by mutual funds, are not "fundamental
restrictions" and may be changed by the Trustees of the Trust if applicable law
permits such a change and the change is consistent with the overall investment
objective and policies of each Fund.
The extent to which a Fund may enter into futures and options
transactions may be limited by the Code requirements for qualification of a Fund
as a regulated investment company. See "Taxation."
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, a Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor or a Manager, subject to the seller's agreement to
repurchase and a Fund's agreement to resell such securities at a mutually agreed
upon date and price. The repurchase price generally equals the price paid by a
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the underlying portfolio security).
Securities subject to repurchase agreements will be held by the Custodian or in
the Federal Reserve/Treasury Book-Entry System or an equivalent foreign system.
The seller under a repurchase agreement will be required to maintain the value
of the underlying securities at not less than 102% of the repurchase price under
the agreement. If the seller defaults on its repurchase obligation, a Fund
holding the repurchase agreement will suffer a loss to the extent that the
proceeds from a sale of the underlying securities are less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting seller
may cause a Fund's rights with respect to such securities to be delayed or
limited. Repurchase agreements are considered to be loans under the 1940 Act.
Reverse Repurchase Agreements.
Each Fund may enter into reverse repurchase agreements. A Fund
typically will invest the proceeds of a reverse repurchase agreement in money
market instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. A Fund may use the proceeds of
reverse repurchase agreements to provide liquidity to meet redemption requests
when sale of a Fund's securities is disadvantageous.
Each Fund causes the custodian to segregate liquid assets, such as
cash, U.S. Government securities or other high grade liquid debt securities
equal in value to its obligations (including accrued interest) with respect to
reverse repurchase agreements. In segregating such assets, the custodian either
places such securities in a segregated account or separately identifies such
assets and renders them unavailable for investment. Such assets are marked to
market daily to ensure full collateralization is maintained.
Dollar Roll Transactions
Each Fund may enter into dollar roll transactions. A dollar roll
transaction involves a sale by a Fund of a security to a financial institution
concurrently with an agreement by a Fund to purchase a similar security from the
institution at a later date at an agreed-upon price. The securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase, a
Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in additional portfolio
B-15
<PAGE>
securities of a Fund, and the income from these investments, together with any
additional fee income received on the sale, may or may not generate income for a
Fund exceeding the yield on the securities sold.
At the time a Fund enters into a dollar roll transaction, it causes its
custodian to segregate liquid assets such as cash, U.S. Government securities or
other high-grade liquid debt securities having a value equal to the purchase
price for the similar security (including accrued interest) and subsequently
marks the assets to market daily to ensure that full collateralization is
maintained.
When-Issued Securities, Forward Commitments and Delayed Settlements
Each Fund may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of a
Fund's commitment. It may be expected that a Fund's net assets will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash.
Each Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, a Fund's liquidity and the ability
of a Manager to manage it may be affected in the event a Fund's forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
Each Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to a Fund on the settlement date. In these cases a Fund may realize a
taxable capital gain or loss. When a Fund engages in when-issued, forward
commitment and delayed settlement transactions, it relies on the other party to
consummate the trade. Failure of such party to do so may result in a Fund's
incurring a loss or missing an opportunity to obtain a price credited to be
advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day a Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities
Each Fund may invest in zero-coupon, step-coupon and pay-in-kind
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon securities are sold at a deep
discount to their face value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because these securities do not pay current
cash income, the price of these securities can be volatile when interest rates
fluctuate. While these securities do not pay current cash income, the Code
requires the holders of these securities to include in income each year the
portion of the original issue discount (or deemed discount) and other non-cash
income on the securities accruing that year. A Fund may be required to
distribute a portion of that discount and income and may be required to dispose
of other portfolio securities, which may occur in periods of adverse market
prices, in order to generate cash to meet these distribution requirements.
Borrowing
Each Fund is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of transactions
in amounts up to 20% of the value of its total assets at the time of such
borrowings. The use of borrowing by the Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of the Fund's assets fluctuate
in value, whereas the interest obligation resulting from a borrowing will be
fixed by the terms of the Fund's agreement with its lender, the asset value per
share of the Fund will tend to increase more when its portfolio securities
increase in
B-16
<PAGE>
value and to decrease more when its portfolio assets decrease in value than
would otherwise be the case if the Fund did not borrow funds. In addition,
interest costs on borrowings may fluctuate with changing market rates of
interest and may partially offset or exceed the return earned on borrowed funds.
Under adverse market conditions, the Fund might have to sell portfolio
securities to meet interest or principal payments at a time when fundamental
investment considerations would not favor such sales.
Lending Portfolio Securities
Each Fund may lend its portfolio securities in an amount not exceeding
30% of its total assets to financial institutions such as banks and brokers if
the loan is collateralized in accordance with applicable regulations. Under the
present regulatory requirements which govern loans of portfolio securities, the
loan collateral must, on each business day, at least equal the value of the
loaned securities and must consist of cash, letters of credit of domestic banks
or domestic branches of foreign banks, or securities of the U.S. Government or
its agencies. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by a Fund if the demand meets the terms of the
letter. Such terms and the issuing bank would have to be satisfactory to a Fund.
Any loan might be secured by any one or more of the three types of collateral.
The terms of a Fund's loans must permit a Fund to reacquire loaned securities on
five days' notice or in time to vote on any serious matter and must meet certain
tests under the Code.
Short Sales
Each Fund is authorized to make short sales of securities which it does
not own or have the right to acquire. In a short sale, a Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, a Fund must borrow the security (generally from
the broker through which the short sale is made) in order to make delivery to
the buyer. Each Fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. Each Fund is said
to have a "short position" in the securities sold until it delivers them to the
broker. The period during which a Fund has a short position can range from one
day to more than a year. Until the security is replaced, the proceeds of the
short sale are retained by the broker, and a Fund is required to pay to the
broker a negotiated portion of any dividends or interest which accrue during the
period of the loan. To meet current margin requirements, a Fund is also required
to deposit with the broker additional cash or securities so that the total
deposit with the broker is maintained daily at 150% of the current market value
of the securities sold short (100% of the current market value if a security is
held in the account that is convertible or exchangeable into the security sold
short within 90 days without restriction other than the payment of money).
Short sales by a Fund create opportunities to increase a Fund's return
but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since each Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, a Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest a Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions a Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
Illiquid Securities
Each Fund may not invest more than 15% of the value of its net assets
in illiquid securities, including restricted securities, that are not deemed to
liquid by the sub-advisor. The Advisor and the Managers will monitor the amount
of illiquid securities in a Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with a Fund's investment
restrictions.
B-17
<PAGE>
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption within
seven days. A Fund might also have to register such restricted securities in
order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the sub-advisor, pursuant to procedures adopted by the Trust's Board of
Trustees, may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale. In all other
cases, however, securities subject to restrictions on resale will be deemed
illiquid.
Risks of Investing in Small Companies
As stated in the prospectus, a Fund may invest in securities of small
companies. Additional risks of such investments include the markets on which
such securities are frequently traded. In many instances the securities of
smaller companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of smaller
companies may be subject to greater and more abrupt price fluctuations. When
making large sales, a Fund may have to sell portfolio holdings at discounts from
quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of smaller company securities.
Investors should be aware that, based on the foregoing factors, an investment in
a Fund may be subject to greater price fluctuations than an investment in a fund
that invests exclusively in larger, more established companies. A Manager's
research efforts may also play a greater role in selecting securities for a Fund
than in a fund that invests in larger, more established companies.
Investment Restrictions
The Trust (on behalf of a Fund) has adopted the following restrictions
as fundamental policies, which may not be changed without the favorable vote of
the holders of a "majority," as defined in the 1940 Act, of the outstanding
voting securities of a Fund. Under the 1940 Act, the "vote of the holders of a
majority of the outstanding voting securities" means the vote of the holders of
the lesser of (I) 67% of the shares of a Fund represented at a meeting at which
the holders of more than 50% of its outstanding shares are represented or (ii)
more than 50% of the outstanding shares of a Fund.
As a matter of fundamental policy, a Fund is diversified; i.e., as to
75% of the value of a its total assets: (I) no more than 5% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities); and (ii) a Fund may not purchase more than 10% of
the outstanding voting securities of an issuer. Each Fund's investment objective
is also fundamental.
In addition, a Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that (I) a Fund may borrow on an unsecured basis from banks for temporary or
emergency purposes or for the clearance of transactions in amounts not exceeding
10% of its total assets (not including the amount borrowed), provided that it
will not make
B-18
<PAGE>
investments while borrowings in excess of 5% of the value of its total assets
are outstanding; and (ii) this restriction shall not prohibit a Fund from
engaging in options, futures and foreign currency transactions or short sales;
2. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of transactions;
3. Act as underwriter (except to the extent a Fund may be deemed to be
an underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although a Fund may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
6. Purchase or sell commodities or commodity futures contracts, except
that a Fund may purchase and sell stock index futures contracts and currency and
financial futures contracts and related options in accordance with any rules of
the Commodity Futures Trading Commission;
7. Invest in oil and gas limited partnerships or oil, gas or mineral
leases;
8. Make loans of money (except for purchases of debt securities
consistent with the investment policies of a Fund and except for repurchase
agreements); or
9. Make investments for the purpose of exercising control or
management.
Each Fund observes the following restrictions as a matter of operating
but not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
Each Fund may not:
1. Invest in the securities of other investment companies or purchase
any other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law.
2. Invest more than 15% of its assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities which are determined by the the
sub-advisor, pursuant to procedures adopted by the Board of Trustees, to be
liquid).
MANAGEMENT
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Managers, Administrator, Custodian and Transfer
Agent. The day to day operations of the Trust are delegated to its officers,
subject to a Fund's investment objectives and policies and to general
supervision by the Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with
the Trust, their business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C>
A. George Battle (54) Trustee Senior Fellow, The Aspen Institute since June, 1995. Director of
1065 Sterling Avenue Peoplesoft, Inc.; Barra, Inc.; and Fair, Isaac. Formerly (until 1995)
Berkeley, CA 94708 Managing Partner, Market Development of Andersen Consulting.
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Frederick August
Eigenbrod, Jr. PhD (57) Trustee Senior Vice President, Right Associates (industrial psychologists)
19925 Stevens Creek Blvd.
Cupertino, CA 95014
Kenneth E. Gregory* (40) President and President of the Advisor; President of L/G Research Inc. (publishers)
4 Orinda Way Trustee and Litman/Gregory & Co., LLC (investment advisors)
Suite 230D
Orinda, CA 94556
Craig A. Litman* (51) Secretary and Treasurer and Secretary of the Advisor; Vice President and Secretary
100 Larkspur Landing Circle Trustee of L/G Research Inc.; Chairman of Litman/Gregory & Co., LLC
Suite 204 Larkspur, CA 94939
Taylor M. Welz (38) Trustee Partner, Bowman & Company, LLP (certified public accountants)
2431 W. March Lane
Suite 100
Stockton, CA 95207
John Coughlan (42) Treasurer Chief Operating Officer, Litman/Gregory & Co., LLC since 1996;
4 Orinda Way Controller, Centex Homes of Northern CA, 1995 - 1996;
Suite 230D Senior Vice President, Countrywide Capital Markets, Inc., 1994;
Orinda, CA 94556, Executive Vice President, TMAC, 1992 - 1994 ; Vice President and
Treasurer, Barnett Range Corporation, prior to 1992
</TABLE>
* denotes Trustees who are "interested persons" of the Trust under the 1940 Act.
The table below illustrates the annual compensation paid to each
Trustee of the Masters' Select Funds Trust:
<TABLE>
<CAPTION>
Aggregate
Compensation Pension or Total
from Masters' Retirement Benefits Estimated Annual Compensation
Select Funds Accrued as Part of Benefits Upon from Masters'
Name of Trustee Trust Fund Expenses Retirement Trust Select Funds
- --------------------- ------------- ------------------- ---------------- ------------
<S> <C> <C> <C> <C>
A. George Battle $10,000 $ 0 $ 0 $10,000
Frederick A. Eigenbrod, Jr $10,000 $ 0 $ 0 $10,000
Taylor M. Welz $10,000 $ 0 $ 0 $10,000
Kenneth E. Gregory $ 0 $ 0 $ 0 $ 0
Craig A. Litman $ 0 $ 0 $ 0 $ 0
</TABLE>
B-20
<PAGE>
Each Trustee who is not an "interested person" of the Funds receives an
annual fee of $10,000 allocated equally between the Funds, plus expenses
incurred by the Trustees in connection with attendance at meetings of the Board
of Trustees and their Committees. As of July 31, 1998, to the best of the
knowledge of the Masters' Select Funds Trust, the Board of Trustees and officers
of the Funds, as a group, owned of record less than 1% of the Funds' outstanding
shares.
The following persons, to the best knowledge of the Trust, owned more
than 5% of the outstanding shares of the Masters' Select Equity Fund as of July
31, 1998:
CHARLES SCHWAB & CO INC
SPL CSTDY A/C FOR EXCL BNFT CUST
MUTUAL FUND DEPT - REINVEST A/C
101 MONTGOMERY ST
SAN FRANCISCO CA 94104-4122 - 49.30%
NATIONAL FINANCIAL SERVICES CORP
FOR THE EXCLUSIVE BENEFIT OF
OUR CUSTOMERS
ATTN TERRI LOUIE
200 LIBERTY ST FL 5
NEW YORK NY 10281-5500 - 7.69%
The following persons, to the best knowledge of the Trust, owned more
than 5% of the outstanding shares of the Masters' Select International Fund as
of July 31, 1998:
CHARLES SCHWAB 7 CO INC
SPL CSTDY A/C FOR EXCL BNFT CUST
MUTUAL FUND DEPT - REINVEST A/C
101 MONTGOMERY ST
SAN FRANCISCO CA 94104-4122 - 63.97%
The Advisor and the Managers
Subject to the supervision of the Board of Trustees, investment
management and related services are provided by the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement"). In addition, the
assets of each Fund are divided into segments by the Advisor, and individual
selection of securities in each segment is provided by a Manager selected by the
Board of Trustees pursuant, in each case, to a form of sub-advisory agreement
("Management Agreement"). Under the Advisory Agreement, the Advisor has agreed
to (I) furnish each Fund with advice and recommendations with respect to the
selection and continued employment of Managers to manage the actual investment
of each Fund's assets; (ii) direct the allocation of each Fund's assets among
such Managers; (iii) oversee the investments made by such Managers on behalf of
each Fund, subject to the ultimate supervision and direction of the Trust's
Board of Trustees; (iv) oversee the actions of the Managers with respect to
voting proxies for each Fund, filing Section 13 ownership reports for each Fund,
and taking other actions on behalf of each Fund; (v) maintain the books and
records required to be maintained by each Fund except to the extent arrangements
have been made for such books and records to be maintained by the administrator,
another agent of each Fund or a Manager; (vi) furnish reports, statements and
other data on securities, economic conditions and other matters related to the
investment of each Fund's assets which each Fund's administrator or distributor
or the officers of the Trust may reasonably request; and (vii) render to the
Trust's Board of Trustees such periodic and special reports with respect to each
Fund's investment activities as the Board may reasonably request, including at
least one in-person appearance annually before the Board of Trustees. The
Advisor has agreed, at its own expense, to maintain such staff and employ or
retain such personnel and consult with such other persons as it shall from time
to time determine to be necessary to the performance of its obligations under
this Agreement. Personnel of the Advisor may serve as officers of the Trust
provided they do so without compensation from the Trust. Without
B-21
<PAGE>
limiting the generality of the foregoing, the staff and personnel of the Advisor
shall be deemed to include persons employed or retained by the Advisor to
furnish statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Advisor or the Trust's Board of Trustees may desire and reasonably request.
With respect to the operation of each Fund, the Advisor has agreed to be
responsible for (I) providing the personnel, office space and equipment
reasonably necessary for the operation of the Trust and each Fund including the
provision of persons qualified to serve as officers of the Trust; (ii)
compensating the Managers selected to invest the assets of each Fund; (iii) the
expenses of printing and distributing extra copies of each Fund's prospectus,
statement of additional information, and sales and advertising materials (but
not the legal, auditing or accounting fees attendant thereto) to prospective
investors (but not to existing shareholders); and (iv) the costs of any special
Board of Trustees meetings or shareholder meetings convened for the primary
benefit of the Advisor or any Manager.
Under each Management Agreement, each Manager agrees to invest its
Allocated Portion of the assets of each Fund in accordance with the investment
objectives, policies and restrictions of each Fund as set forth in each Fund's
and Trust's governing documents, including, without limitation, the Trust's
Agreement and Declaration of Trust and By-Laws; each Fund's prospectus,
statement of additional information, and undertakings; and such other
limitations, policies and procedures as the Advisor or the Trustees of the Trust
may impose from time to time in writing to Manager. In providing such services,
Manager shall at all times adhere to the provisions and restrictions contained
in the federal securities laws, applicable state securities laws, the Internal
Revenue Code, and other applicable law.
Without limiting the generality of the foregoing, each Manager has
agreed to (I) furnish each Fund with advice and recommendations with respect to
the investment of the Manager's Allocated Portion of each Fund's assets, (ii)
effect the purchase and sale of portfolio securities for Manager's Allocated
Portion or determine that a portion of such Allocated Portion will remain
uninvested; (iii) manage and oversee the investments of the Manager's Allocated
Portion, subject to the ultimate supervision and direction of the Trust's Board
of Trustees; (iv) vote proxies and take other actions with respect to the
securities in Manager's Allocated Portion; (v) maintain the books and records
required to be maintained with respect to the securities in Manager's Allocated
Portion; (vi) furnish reports, statements and other data on securities, economic
conditions and other matters related to the investment of each Fund's assets
which the Advisor, Trustees or the officers of the Trust may reasonably request;
and (vii) render to the Trust's Board of Trustees such periodic and special
reports with respect to Manager's Allocated Portion as the Board may reasonably
request.
As compensation for the Advisor's services (including payment of the
Managers' fees), each Fund pays it an advisory fee at the rate specified in the
prospectus. In addition to the fees payable to the Advisor and the
Administrator, the Trust is responsible for its operating expenses, including:
fees and expenses incurred in connection with the issuance, registration and
transfer of its shares; brokerage and commission expenses; all expenses of
transfer, receipt, safekeeping, servicing and accounting for the cash,
securities and other property of the Trust for the benefit of each Fund
including all fees and expenses of its custodian, shareholder services agent and
accounting services agent; interest charges on any borrowings; costs and
expenses of pricing and calculating its daily net asset value and of maintaining
its books of account required under the Investment Company Act; taxes, if any; a
pro rata portion of expenditures in connection with meetings of each Fund's
shareholders and the Trust's Board of Trustees that are properly payable by each
Fund; salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Advisor; insurance
premiums on property or personnel of each Fund which inure to its benefit,
including liability and fidelity bond insurance; the cost of preparing and
printing reports, proxy statements, prospectuses and statements of additional
information of each Fund or other communications for distribution to existing
shareholders; legal, auditing and accounting fees; trade association dues; fees
and expenses (including legal fees) of registering and maintaining registration
of its shares for sale under federal and applicable state and foreign securities
laws; all expenses of maintaining and servicing shareholder accounts, including
all charges for transfer, shareholder recordkeeping, dividend disbursing,
redemption, and other agents for the benefit
B-22
<PAGE>
of each Fund, if any; and all other charges and costs of its operation plus any
extraordinary and non-recurring expenses, except as otherwise prescribed in the
Advisory Agreement.
The Advisor may agree to waive certain of its fees or reimburse each
Fund for certain expenses, in order to limit the expense ratio of each Fund. In
that event, subject to approval by the Trust's Board of Trustees, each Fund may
reimburse the Advisor in subsequent years for fees waived and expenses
reimbursed, provided the expense ratio before reimbursement is less than the
expense limitation in effect at that time.
The Advisor is controlled by Craig A. Litman and Kenneth E. Gregory.
Under the Advisory Agreement and each Management Agreement, the Advisor
and the Managers will not be liable to the Trust for any error of judgment by
the Advisor or Managers or any loss sustained by the Trust except in the case of
a breach of fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages will be limited as provided in the
1940 Act) or of willful misfeasance, bad faith or gross negligence by reason of
reckless disregard of its obligations and duties under the applicable agreement.
The Advisory Agreement and the Management Agreements will remain in
effect for a period not to exceed two years. Thereafter, if not terminated, each
Advisory and Management Agreement will continue automatically for successive
annual periods, provided that such continuance is specifically approved at least
annually (I) by a majority vote of the
B-23
<PAGE>
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Portfolio.
The Advisory and Management Agreements are terminable by vote of the
Board of Trustees or by the holders of a majority of the outstanding voting
securities of the Trust at any time without penalty, on 60 days written notice
to the Advisor or a Manager. The Advisory and Management Agreements also may be
terminated by the Advisor or a Manager on 60 days written notice to the Trust.
The Advisory and Management Agreements terminate automatically upon their
assignment (as defined in the 1940 Act).
The Administrator. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (I) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Securities and Exchange Commission and any other governmental
agency (the Trust agreeing to supply or cause to be supplied to the
Administrator all necessary financial and other information in connection with
the foregoing); (iv) preparing such applications and reports as may be necessary
to register or maintain the Trust's registration and/or the registration of the
shares of the Trust under the securities or "blue sky" laws of the various
states selected by the Trust (the Trust agreeing to pay all filing fees or other
similar fees in connection therewith); (v) responding to all inquiries or other
communications of shareholders, if any, which are directed to the Administrator,
or if any such inquiry or communication is more properly to be responded to by
the Trust's custodian, transfer agent or accounting services agent, overseeing
their response thereto; (vi) overseeing all relationships between the Trust and
any custodian(s), transfer agent(s) and accounting services agent(s), including
the negotiation of agreements and the supervision of the performance of such
agreements; (vii) together with the Advisor, monitoring compliance by the
Managers with tax, securities and other applicable requirements; and (viii)
authorizing and directing any of the Administrator's directors, officers and
employees who may be elected as Trustees or officers of the Trust to serve in
the capacities in which they are elected. All services to be furnished by the
Administrator under this Agreement may be furnished through the medium of any
such directors, officers or employees of the Administrator.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Each Management Agreement states that, with respect to the segment of
each Fund's portfolio allocated to the Manager, the Manager shall be responsible
for broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Manager shall not direct orders to an affiliated person of the
Manager without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. In general, a Manager's primary
consideration in effecting a securities transaction will be execution at the
most favorable cost or proceeds under the circumstances. In selecting a
broker-dealer to execute each particular transaction, a Manager may take the
following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of each Fund on a continuing
basis. The price to each Fund in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably justified
by other aspects of the portfolio execution services offered.
Brokerage commissions paid for the year ended December 31, 1997 by the
Masters' Select Equity Fund and the Masters' Select International Fund,
respectively, were $1,537,490(1) and $117,416(2). Of these amounts, the
percentages attributable to affiliated broker transactions were 2.9% and 0%,
respectively.
- --------
(1) For the period 12/31/96 (commencement of operations) to 12/31/97.
(2) For the period 12/1/97 (commencement of operations) to 12/31/97.
B-24
<PAGE>
Subject to such policies as the Advisor and the Board of Trustees of
the Trust may determine, a Manager shall not be deemed to have acted unlawfully
or to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused each Fund to pay a broker or dealer that provides
(directly or indirectly) brokerage or research services to the Manager an amount
of commission for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Manager determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Manager's or Advisor's overall responsibilities
with respect to each Fund or other advisory clients. Each Manager is further
authorized to allocate the orders placed by it on behalf of each Fund to such
brokers or dealers who also provide research or statistical material, or other
services, to the Trust, the Advisor, or any affiliate of either. Such allocation
shall be in such amounts and proportions as the Manager shall determine, and
each Manager shall report on such allocations regularly to the Advisor and the
Trust, indicating the broker-dealers to whom such allocations have been made and
the basis therefor. Each Manager is also authorized to consider sales of shares
of each Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions, subject to the requirements of best execution.
On occasions when a Manager deems the purchase or sale of a security to
be in the best interest of each Fund as well as other clients of the Manager,
the Manager, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to each Fund and to such other clients.
NET ASSET VALUE
The net asset value of a Fund's shares will fluctuate and is determined
as of the close of trading on the New York Stock Exchange (currently 4:00 p.m.
Eastern time) each business day. The Exchange annually announces the days on
which it will not be open for trading. The most recent announcement indicates
that it will not be open on the following days: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, the Exchange may close on days not included in that
announcement.
The net asset value per share is computed by dividing the value of the
securities held by a Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares in a Fund outstanding at such time.
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. In that case, the
price used to determine a Fund's net asset value on the last day on which such
exchange was open will be used, unless the Trust's Board of Trustees determines
that a different price should be used. Furthermore, trading takes place in
various foreign markets on days in which the NYSE is not open for trading and on
which a Fund's net asset value is not calculated. Occasionally, events affecting
the values of such securities in U.S. dollars on a day on which a Fund
calculates its net asset value may occur between the times when such securities
are valued and the close of the NYSE that will not be reflected in the
computation of a Fund's net asset value unless the Board or its delegates deem
that such events would materially affect the net asset value, in which case an
adjustment would be made.
Generally, a Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Managers and the Trust's Pricing Committee pursuant to procedures approved by or
under the direction of the Board.
B-25
<PAGE>
Each Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Managers to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a Fund if
acquired within 60 days of maturity or, if already held by a Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by a Fund are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
Board, or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by a Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract is the last sale or settlement price on the exchange or board
of trade on which the future is traded or, if no sales are reported, at the mean
between the last bid and asked price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board. If an options or futures exchange closes after
the time at which a Fund's net asset value is calculated, the last sale or last
bid and asked prices as of that time will be used to calculate the net asset
value.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of a Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
Each Fund will be taxed, under the Internal Revenue Code (the "Code"),
as a separate entity from any other series of the Trust, and it intends to elect
to qualify for treatment as a regulated investment company ("RIC") under
Subchapter M of the Code. In each taxable year that a Fund qualifies, a Fund
(but not its shareholders) will be relieved of federal income tax on that part
of its investment company taxable income (consisting generally of interest and
dividend income, net short term capital gain and net realized gains from
currency transactions) and net capital gain that is distributed to shareholders.
In order to qualify for treatment as a RIC, a Fund must distribute
annually to shareholders at least 90% of its investment company taxable income
and must meet several additional requirements. Among these requirements are the
following: (1) at least 90% of a Fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or foreign currencies, or
other income derived with respect to its business of investing in securities or
currencies; (2) at the close of each quarter of a Fund's taxable year, at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities,
B-26
<PAGE>
limited in respect of any one issuer, to an amount that does not exceed 5% of
the value of a Fund and that does not represent more than 10% of the outstanding
voting securities of such issuer; and (3) at the close of each quarter of a
Fund's taxable year, not more than 25% of the value of its assets may be
invested in securities (other than U.S. Government securities or the securities
of other RICs) of any one issuer.
Distributions of net investment income and net realized capital gains
by a Fund will be taxable to shareholders whether made in cash or reinvested in
shares. In determining amounts of net realized capital gains to be distributed,
any capital loss carryovers from prior years will be applied against capital
gains. Shareholders receiving distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share of a Fund on the reinvestment date. Fund
distributions also will be included in individual and corporate shareholders'
income on which the alternative minimum tax may be imposed.
Each Fund or any securities dealer effecting a redemption of a Fund's
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, a Fund will be required to withhold federal income tax at the rate of
31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which a Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding.
Each Fund intends to declare and pay dividends and other distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income, a Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
Each Fund may receive dividend distributions from U.S. corporations. To
the extent that a Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of a Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
The use of hedging strategies, such as entering into futures contracts
and forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by a Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by a
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the paid by the Fund is recorded as an
asset and is subsequently adjusted to the current market value of the option.
Any gain or loss realized by the Fund upon the expiration or sale of such
options held by the Fund generally will be capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by that Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
B-27
<PAGE>
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code, rather than
as capital gain or loss.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. All or a portion of a loss realized upon the redemption of
shares of the Fund may be disallowed to the extent shares of the same Fund are
purchased (including shares acquired by means of reinvested dividends) within 30
days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Funds. Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on certain payments received from the Fund. Shareholders are advised
to consult with their own tax advisers concerning the application of foreign,
federal, state and local taxes to an investment in the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Fund's investment company taxable income (whether
paid in cash or invested in additional shares) will be taxable to shareholders
as ordinary income to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gain (whether paid in cash or invested
in additional shares) will be taxable to shareholders as long-term capital gain,
regardless of how long they have held their Fund shares.
Dividends declared by the Fund in October, November or December of any
year and payable to shareholders of record on a date in one of such months will
be deemed to have been paid by the Fund and received by the shareholders on the
record date if the dividends are paid by the Fund during the following January.
Accordingly, such dividends will be taxed to shareholders for the year in which
the record date falls.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
dividends and capital gain distributions paid to such shareholders who otherwise
are subject to backup withholding.
B-28
<PAGE>
PERFORMANCE INFORMATION
Total Return
Average annual total return quotations used in the Fund's advertising
and promotional materials are calculated according to the following formula:
n
P(1 + T) = ERV
where "P" equals a hypothetical initial payment of $1000; "T" equals average
annual total return; "n" equals the number of years; and "ERV" equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions.
Yield
Annualized yield quotations used in the Fund's advertising and
promotional materials are calculated by dividing the Fund's investment income
for a specified thirty-day period, net of expenses, by the average number of
shares outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
6
YIELD = 2 [(a-b + 1) - 1]
---
cd
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends and "d" equals the maximum offering price per share on the
last day of the period. Except as noted below, in determining net investment
income earned during the period ("a" in the above formula), the Fund calculates
interest earned on each debt obligation held by it during the period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
period or, if the obligation was purchased during the period, the purchase price
plus accrued interest; (2) dividing the yield to maturity by 360 and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
For purposes of these calculations, the maturity of an obligation with
one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date.
Other information
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in
the Fund will fluctuate, and an investor's redemption proceeds may be more or
less than the original investment amount. In advertising and promotional
materials the Fund may compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of a Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, The Wall Street
Journal, Money Magazine, Forbes, Business Week, Financial World and Barron's.
B-29
<PAGE>
GENERAL INFORMATION
The Trust is a Delaware Business Trust organized on August 1, 1996. The
Masters' Select Equity Fund series of shares commenced operations on December
31, 1996. The Masters' Select International Fund commenced operations on
December 1, 1997. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interest in the Fund. Each share
represents an interest in the Fund proportionately equal to the interest of each
other share. Upon the Trust's liquidation, all shareholders would share pro rata
in the net assets of the Fund available for distribution to shareholders. If
they deem it advisable and in the best interest of shareholders, the Board of
Trustees may create additional series of shares which differ from each other
only as to dividends. The Board of Trustees has created two series of shares,
and may create additional series in the future, which have separate assets and
liabilities. Income and operating expenses not specifically attributable to a
particular Fund will be allocated fairly among the Funds by the Trustees,
generally on the basis of the relative net assets of each Fund.
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Trust's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, MA 02110 is responsible for holding the Funds' assets
and acts as the Trust's accounting services agent. The Trust's independent
accountants, McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017,
assist in the preparation of certain reports to the Securities and Exchange
Commission and the Fund's tax returns.
The Masters' Select Funds reserve the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Fund and valued as they are for purposes of computing
the Fund's net asset value (a redemption in kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting these
securities into cash.
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<PAGE>
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and report thereon for
the Funds for the year ended December 31, 1997 are incorporated by reference.
The opinion of McGladrey & Pullen, LLP, independent accountants, with respect to
the audited financial statements, is incorporated herein in its entirety in
reliance upon such report of McGladrey & Pullen, LLP and on the authority of
such firm as experts in auditing and accounting. Shareholders will receive a
copy of the audited and unaudited financial statements at no additional charge
when requesting a copy of the Statement of Additional Information.
B-31
<PAGE>
APPENDIX
Description of Ratings
Moody's Investors Service, Inc.: Corporate Bond Ratings
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa---Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa
and Aa rating classifications. 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.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Standard & Poor's Corporation: Corporate Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Commercial Paper Ratings
Moody's commercial paper ratings are assessments of the issuer's
ability to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers: Prime 1--highest quality; Prime
2--higher quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety
B-32
<PAGE>
characteristics. Capacity for timely payment on issues with the designation
"A-2" is strong. However, the relative degree of safety is not as high as for
issues designated A-1. Issues carrying the designation "A-3" have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effect of changes in circumstances than obligations carrying the higher
designations.
B-33
<PAGE>
As filed with the Securities and
Exchange Commission on August 7, 1998
Registration No. 333-10015
File No. 811-07763
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Part C
of
Form N-1A
COMBINED REGISTRATION STATEMENT
MASTERS' SELECT FUNDS TRUST
---------------------------
Masters' Select Equity Fund
Masters' Select International Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
The following financial statements are included in Part B of the
Registration Statement:
Statement of Assets and Liabilities as of December 31, 1997 Notes to
Statement of Assets and Liabilities
(b) Exhibits:
(1) (a) Agreement and Declaration of Trust(1)
(b) Amendment to Agreement and Declaration of Trust(2)
(2) By-Laws(1)
(3) Not applicable
(4) Specimen stock certificate
(5) (a) Form of Investment Advisory Agreement(2)
(b) (i) Investment Management Agreement with Davis Selected
Advisers LP(3)
(ii) Investment Management Agreement with Friess
Associates, Inc.(3)+
(iii) Investment Management Agreement with Jennison
Associates(3)+
(iv) Investment Management Agreement with Societe Generale
Asset Management Corp.(3)
(v) Investment Management Agreement with Southeastern
Asset Management, Inc.(3)
(vi) Investment Management Agreement with Strong Capital
Management, Inc.(3)
(vii) Form of Investment Management Agreement with Masters'
Select International Sub-Advisors(4)
(viii) Form of Investment Management Agreement with Janus
Capital Corp.(4)
(6) Distribution Agreement(3)
(7) Not applicable
(8) Custodian Agreement(3)
(9) Administration Agreement with Investment Company Administration
Corporation(2)
(10) Opinion and consent of counsel(3)
(11) Consent of Independent Auditors(3)
(12) Not applicable
- --------
(1) Previously filed as an exhibit to the Registration Statement on Form
N-1A of the Registration (File No. 333-10015) on August 12, 1996, and
incorporated herein by reference.
(2) Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A of the Registrant (File No. 333-10015) on
November 15, 1996, and incorporated herein by reference.
(3) Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A of the Registrant (File No. 333-10015) on
December 16, 1996, and incorporated herein by reference.
(4) Previously filed as an exhibit to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A of the Registrant (File No. 333-10015) on
August 29, 1997, and incorporated herein by reference.
<PAGE>
(13) Investment letter(3)
(14) Individual Retirement Account forms(5)
(15) Not applicable
(16) Not applicable
(17) Financial Data Schedule
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
The number of record holders for each fund as of July 31, 1998:
Name of Fund Number of Record Holders
------------ ------------------------
Masters' Select Equity Fund 8,820
Masters' Select International Fund 1,668
Item 27. Indemnification:
Article VI of Registrant's By-Laws states as follows:
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose
of this Article, "agent" means any person who is or was a Trustee, officer,
employee or other agent of this Trust or is or was serving at the request of
this Trust as a Trustee, director, officer, employee or agent of another foreign
or domestic corporation, partnership, joint venture, trust or other enterprise
or was a Trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes without limitation attorney's fees and any expenses of
establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding (other than an action by or in the right of this Trust) by
reason of the fact that such person is or was an agent of this Trust, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceedings, if it is determined
that persons acted in good faith and reasonably believed:
(a) in the case of conduct in his official capacity as a
Trustee of the Trust, that his conduct was in the
Trust's best interests, and
(b) in all other cases, that his conduct was at least not
opposed to the Trust's best interests, and
(c) in the case of a criminal proceeding, that he had no
reasonable cause to believe the conduct of that
person was unlawful.
The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not of itself create a presumption that the person did not act in good faith and
in a manner which the person reasonably believed to be in the best interests of
this Trust or that the person had reasonable cause to believe that the person's
conduct was unlawful.
- --------
(5) To be filed by amendment.
<PAGE>
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action by or in the right of this Trust to
procure a judgment in its favor by reason of the fact that that person is or was
an agent of this Trust, against expenses actually and reasonably incurred by
that person in connection with the defense or settlement of that action if that
person acted in good faith, in a manner that person believed to be in the best
interests of this Trust and with such care, including reasonable inquiry, as an
ordinarily prudent person in a like position would use under similar
circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any
provision to the contrary contained herein, there shall be no right to
indemnification for any liability arising by reason of willful misfeasance, bad
faith, gross negligence, or the reckless disregard of the duties involved in the
conduct of the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this
Article:
(a) In respect of any claim, issue, or matter as to which
that person shall have been adjudged to be liable on
the basis that personal benefit was improperly
received by him, whether or not the benefit resulted
from an action taken in the person's official
capacity; or
(b) In respect of any claim, issue or matter as to which
that person shall have been adjudged to be liable in
the performance of that person's duty to this Trust,
unless and only to the extent that the court in which
that action was brought shall determine upon
application that in view of all the circumstances of
the case, that person was not liable by reason of the
disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to
indemnity for the expenses which the court shall
determine; or
(c) Of amounts paid in settling or otherwise disposing of
a threatened or pending action, with or without court
approval, or of expenses incurred in defending a
threatened or pending action which is settled or
otherwise disposed of without court approval, unless
the required approval set forth in Section 6 of this
Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an
agent of this Trust has been successful on the merits in defense of any
proceeding referred to in Sections 2 or 3 of this Article or in defense of nay
claim, issue or matter therein, before the court or other body before whom the
proceeding was brought, the agent shall be indemnified against expenses actually
and reasonably incurred by the agent in connection therewith, provided that the
Board of Trustees, including a majority who are disinterested, non-party
Trustees, also determines that based upon a review of the facts, the agent was
not liable by reason of the disabling conduct referred to in Section 4 of this
Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5
of this Article, any indemnification under this Article shall be made by this
Trust only if authorized in the specific case on a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 2 or 3 of this
Article and is not prohibited from indemnification because of the disabling
conduct set forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of Trustees
who are not parties to the proceeding and are not
interested persons of the Trust (as defined in the
Investment Company Act of 1940); or
(b) A written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending
any proceeding may be advanced by this Trust before the final disposition of the
proceeding upon a written undertaking by or on behalf of the agent, to repay the
amount of the advance if it is ultimately determined that he or she is not
entitled to indemnification, together with at least one of the following as a
condition to the advance: (i) security for the undertaking; or (ii) the
existence of insurance protecting the Trust against losses arising by reason of
any lawful advances; or (iii) a
<PAGE>
determination by a majority of a quorum of Trustees who are not parties to the
proceeding and are not interested persons of the Trust, or by an independent
legal counsel in a written opinion, based on a review of readily available facts
that there is reason to believe that the agent ultimately will be found entitled
to indemnification. Determinations and authorizations of payments under this
Section must be made in the manner specified in Section 6 of this Article for
determining that the indemnification is permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this
Article shall affect any right to indemnification to which persons other than
Trustees and officers of this Trust or any subsidiary hereof may be entitled by
contract or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be
made under this Article, except as provided in Sections 5 or 6 in any
circumstances where it appears:
(a) that it would be inconsistent with a provision of the
Agreement and Declaration of Trust of the Trust, a
resolution of the shareholders, or an agreement in
effect at the time of accrual of the alleged cause of
action asserted in the proceeding in which the
expenses were incurred or other amounts were paid
which prohibits or otherwise limits indemnification;
or
(b) that it would be inconsistent with any condition
expressly imposed by a court in approving a
settlement.
Section 10. INSURANCE. Upon and in the event of a
determination by the Board of Trustees of this Trust to purchase such insurance,
this Trust shall purchase and maintain insurance on behalf of any agent of this
Trust against any liability asserted against or incurred by the agent in such
capacity or arising out of the agent's status as such, but only to the extent
that this Trust would have the power to indemnify the agent against that
liability under the provisions of this Article and the Agreement and Declaration
of Trust of the Trust.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article
does not apply to nay proceeding against any Trustee, investment manager or
other fiduciary of an employee benefit plan in that person's capacity as such,
even though that person may also be an agent of this Trust as defined in Section
1 of this Article. Nothing contained in this Article shall imit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
Item 28. Business and Other Connections of Investment Adviser.
The information required by this item is contained in the Form
ADV of the following entities and is incorporated herein by reference:
Name of investment adviser File No.
-------------------------- --------
Litman/Gregory Fund Advisors, LLC 801-52710
Davis Selected Advisers, L.P. 801-31648
Southeastern Asset Management, Inc. 801-11123
Jennison Associates Capital Corp. 801-5608
Freiss and Associates 801-16178
Strong Capital Management, Inc. 801-10724
Societe Generale Asset Management 801-36486
Janus Capital Corp. 801-13991
Bee & Associates 801-34538
Harris Associates 801-50333
Artisan Partners 801-48435
BPI Global Asset Management 801-53972
<PAGE>
Item 29. Principal Underwriters.
(a) First Fund Distributors, Inc. currently serves as
distributor of the shares of:
Advisors Series Trust
Al Frank Fund (The)
American Trust Allegiance Fund
Avatar Advantage Balanced Fund (The)
Avatar Advantage Equity Allocation Fund (The)
Avatar Advantage Int'l Equity Allocation Fund (The)
Chase Growth Fund
Edgar Lomax Value Fund
Information Tech 100 Mutual Fund
Kaminski Poland Fund
Rockhaven Fund
Rockhaven Premier Dividend Fund
Van Deventer & Hoch American Value Fund
RNC Mutual Fund Group, Inc.
PIC Investment Trust
Professionally Managed Portfolios
Academy Value Fund
Avondale Total Return Fund
Brandes Investment Funds
Boston Balanced Fund
Osterweis Fund
Perkins Discovery Fund
Perkins Opportunity Fund
ProConscience Women's Equity Mutual Fund
Trent Equity Fund
Leonetti Balanced Fund
Lighthouse Contrarian Fund
U.S. Global Leaders Growth Fund
Harris Bretall Sullivan & Smith Growth Equity Fund
Pzena Focused Value Fund
Titan Financial Services Fund
PGP Korea Growth Fund
PGP Asia Growth Fund
Guinness Flight Investment Funds
Jurika & Voyles Fund Group
Masters Select Investment Trust
Kayne Anderson Mutual Funds
O'Shaughnessy Funds, Inc.
Fleming Capital Mutual Fund Group, Inc.
Fremont Mutual Funds, Inc.
Rainier Investment Management Mutual Funds
The Purisima Funds
UBS Private Investor Funds
<PAGE>
(b) The officers of First Fund Distributors, Inc. are:
Robert H. Wadsworth President and Treasurer
Eric Banhazl Vice President
Steven J. Paggioli Vice President and Secretary
Each officer's business address with the Distributor is 4455 E. Camelback Rd.,
Ste. 261-E, Phoenix, AZ 85018.
(c) Not applicable.
Items 30. Location of Accounts and Records.
The accounts, books and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the Investment Company Act
of 1940 and the rules promulgated thereunder are in the possession of the
following persons:
(a) the documents required to be maintained by paragraph (4)
of Rule 31a-1(b) will be maintained by the Registrant;
(b) the documents required to be maintained by paragraphs (5),
(6), (10) and (11) of Rule 31a-1(b) will be maintained by the respective
investment managers:
Davis Selected Advisers, L.P., 124 East Marcy Street, Santa
Fe, NM 87501
Southeastern Asset Management, Inc., 6075 Poplar Avenue,
Memphis, TN 38119
Jennison Associates Capital Corp., 466 Lexington Avenue, New
York, NY 10017
Friess and Associates, 3711 Kenett Pike, Greenville, DE 19807
Strong Capital Management, Inc., 100 Heritage Reserve,
Menomonee Falls, WI 53201
Societe Generale Asset Management, 1221 Avenue of the
Americas, New York, NY 10020
Janus Capital Corp., 100 Fillmore St., Denver, Colorado
80206-4928
Bee & Associates, 370 Seventeenth Street, Suite 3560, Denver,
Colorado 80202
Harris Associates, Two North LaSalle, Suite 500, Chicago,
Illinois 60602-3790
Artisan Partners, 1000 North Water Street, Suite 1770,
Milwaukee, Wisconsin 53202
BPI Global Asset Management, Tower Place at the Summit, 1900
Summit Tower Blvd., Ste. 450, Orlando, FL 32810
(c) all other documents will be maintained by Registrant's
custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02110.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Registrant hereby undertakes to:
(a) File a post-effective amendment, using financial
statements which may not be certified, within four to
six months of the effective date of this Registration
Statement for the Masters' Select International Fund;
and
(b) Furnish each person to whom a Prospectus is delivered
a copy of Registrant's latest annual request to
shareholders, upon request and without charge.
<PAGE>
(c) If requested to do so by the holders of at least 10%
of the Trust's outstanding shares, call a meeting of
shareholders for the purposes of voting upon the
question of removal of a trustee and assist in
communications with other shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement (File No. 333-10015) to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Orinda, State of
California on the 7th day of August, 1998.
MASTERS' SELECT FUNDS TRUST
By: /s/ Kenneth E. Gregory
----------------------
Kenneth E. Gregory
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Kenneth E. Gregory President and August 7, 1998
- ---------------------- Trustee
Kenneth E. Gregory
/s/ Craig A. Litman Trustee August 7, 1998
- -------------------
Craig A. Litman
/s/ A. George Battle Trustee August 7, 1998
- --------------------
A. George Battle
/s/ Frederick A. Eigenbrod, Jr. Trustee August 7, 1998
- -------------------------------
Frederick A. Eigenbrod, Jr.
/s/ Taylor M. Welz Trustee August 7, 1998
- ------------------
Taylor M. Welz
/s/ John Coughlan Chief Financial August 7, 1998
- -----------------
and Accounting Officer
John Coughlan
</TABLE>
<PAGE>
As filed with the Securities
Exchange Commission on August 7, 1998
Registration No. 333-10015
File No. 811-07763
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
EXHIBITS TO
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 4 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 6 [X]
MASTERS' SELECT FUNDS TRUST
(Exact name of registrant as specified in charter)
4 Orinda Way, Suite 230-D
Orinda, CA 94563
(Address of principal executive offices)
Registrant's telephone number, including area code: (925) 254-8999
Exhibit 11
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
(11) Consent of McGladrey & Pullen LLP
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated February 13, 1998 on
the financial statements of The Masters' Select Equity Fund and The Masters'
Select International Fund, separate series of Masters' Select Funds Trust,
incorporated by reference therein in Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A, File No. 333-10015, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under
the caption "Financial Highlights" and in the Statement of Additional
Information under the captions "General Information" and "Financial Statements."
McGladrey & Pullen, LLP
New York, New York
August 6, 1998
