X.COM FUNDS
X.COM PREMIER S&P 500 FUND
X.COM U.S.A. BOND FUND
X.COM U.S.A. MONEY MARKET FUND
PROSPECTUS
November 18, 1999
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The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this Prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
Page
INTRODUCTION...................................................................3
ABOUT EACH OF THE FUNDS........................................................4
THE X.COM PREMIER S&P 500 FUND...........................................4
THE X.COM U.S.A. BOND FUND...............................................6
THE X.COM U.S.A. MONEY MARKET FUND.......................................7
FEES AND EXPENSES..............................................................9
MORE ABOUT THE FUND'S INVESTMENT STRATEGIES AND RISKS.........................11
FUND MANAGEMENT...............................................................13
THE FUNDS' STRUCTURE..........................................................14
PRICING OF FUND SHARES........................................................15
HOW TO BUY AND SELL SHARES OF THE X.COM FUNDS.................................15
DIVIDENDS AND OTHER DISTRIBUTIONS.............................................19
TAX CONSEQUENCES..............................................................19
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INTRODUCTION
Who Can Invest in the Fund?
The Funds are for on-line investors that are customers of X.com Corporation
("X.com") and First Western National Bank (the "Bank"), which is under contract
to provide X.com customers with various banking and financial services. The Bank
is a member of the Federal Deposit Insurance Corporation ("FDIC"). To purchase
shares of the Fund, you must open an account with the Bank. Simply follow the
instructions on our website, www.X.com. You will also need to complete an X.com
Financial Services Account Application and follow the instructions provided
under "How to Buy and Sell Shares" later in this Prospectus.
You are also required to consent to receive all information about the Fund
electronically, both to open an account and during the time you own shares of
the Fund. If you revoke your consent to receive this information electronically,
fail to maintain an e-mail account, or close your account, the Funds may, to the
extent permitted by the federal securities laws, redeem your shares, and will,
in any event, prohibit additional investments in the Funds, including the
reinvestment of dividends.
What is a Master/Feeder Fund Structure?
The X.com Funds described in this Prospectus are feeder funds that invest all of
their assets in a corresponding master fund. A master/feeder fund structure is a
two-tier fund structure made up of a master portfolio that invests in
securities, and a feeder fund that invests in the master portfolio. Barclays
Global Fund Advisors ("BGFA") serves as the investment adviser to each of the
master funds. BGFA is a subsidiary of Barclays Global Investors, N.A., the
world's largest institutional investment adviser. As of August 31, 1999, BGFA
and its affiliates provided investment advisory services for over $681.4 billion
of assets.
By employing the master/feeder structure for the Funds, X.com is able to offer
investors not only leading-edge online products and services, but also the
economies of scale and experience of an established mutual fund adviser like
BGFA.
What are Index Funds?
Index funds are often described as "passively managed" in that they seek to
match the performance of a specific benchmark index by holding either all the
securities that make up this index or a highly representative sample. In the
case of the X.com Premier S&P 500 Fund that benchmark is the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index"). For the X.com U.S.A. Bond
Fund the benchmark is the Lehman Brothers Government/Corporate Bond Index (the
"LB Bond Index").
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* The staff of the Securities and Exchange Commission (the "Staff") has
informally indicated its view that the Funds may not involuntarily redeem
your shares if you revoke your consent to receive shareholder documents
electronically or fail to maintain an e-mail account. However, should the
Staff's position on this issue change, the funds intend to involuntarily
redeem your shares under such circumstances.
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ABOUT EACH OF THE FUNDS
This portion of the Prospectus provides a description of each Fund's investment
objective, principal investment strategies and risks. Of course, there can be no
assurance that any Fund will achieve its investment objective.
Because the investment characteristics and investment risks of the Funds match
those of each Funds' corresponding Master Portfolio, the discussion of each
Fund's investment objectives, strategies and risks also includes a description
of the investment characteristics and risks associated with the investments of
the corresponding Master Portfolios. Each Fund's performance will correspond
directly to the performance of the related Portfolio.
Please note that your investments in the Funds are not deposits of the Bank or
any other bank or financial institution, and are not insured by the Federal
Deposit Insurance Corporation ("FDIC") or any other government agency. Because
each Fund is subject to investment risks, you may lose money if you invest in
the Funds.
The X.com Premier S&P 500 Fund
Investment Objective
The X.com Premier S&P 500 Fund (the "Premier S&P 500 Fund")* seeks to
approximate as closely as practicable, before fees and expenses, the
capitalization-weighted total rate of return of the S&P 500 Index.** The S&P 500
Index, a widely recognized benchmark for U.S. stocks, currently represents about
75% of the market capitalization of all publicly traded common stocks in the
United States. The S&P 500 Index includes 500 established companies representing
different sectors of the U.S. economy (including industrial, utilities,
financial, and transportation) selected by Standard & Poor's.
"Capitalization-weighted total rate of return" means that each stock in the
index contributes to the index in the same proportion as the value of its
shares. Thus, if the shares of Company A are worth twice as much as the shares
of Company B, Company A's return will count twice as much as Company B's in
calculating the index's overall return.
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* The Premier S&P 500 Fund is a "premier" fund because, because it
provides low-cost access to the S&P 500 Index. Initially, X.com Asset
Management, Inc., the Fund's adviser, will not charge a fee for the
services it provides, and it will also reimburse the Premier S&P 500
Fund for all operating expenses incurred at the master fund levels. In
addition, X.com Asset Management, Inc., will pay the Premier S&P 500
Fund one additional basis point.
** "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's
500(R)," and "500" are trademarks of The McGraw-Hill Companies, Inc.
and have been licensed by X.com Asset Management, Inc. for use in
connection with the Premier S&P 500 Fund. The Premier S&P 500 Fund is
not sponsored, endorsed, sold, or promoted by Standard & Poor's and
Standard & Poor's makes no representation regarding the advisability of
investing in the Premier S&P 500 Fund.
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Principal Strategies
The Premier S&P 500 Fund does not invest directly in a portfolio of securities.
Instead, it seeks to achieve its investment objective by investing all of its
assets in the S&P 500 Index Master Portfolio ("S&P 500 Portfolio"), a series of
Master Investment Portfolio ("MIP"), a registered open-end management investment
company issuing individual interests in multiple series (each a "Portfolio").
The S&P 500 Portfolio seeks to provide investment results that correspond,
before fees and expenses, to the total return of the publicly traded common
stocks, in the aggregate, as represented by the S&P 500 Index. To do so, the S&P
500 Portfolio invests substantially all of its assets in the same stocks and in
substantially the same percentages as the S&P 500 Index.
Under normal market conditions, the S&P 500 Portfolio will invest at least 90%
of its assets in the stocks making up the S&P 500 Index. Over time, the S&P 500
Portfolio attempts to achieve, in both rising and falling markets, a correlation
of at least 95% between the capitalization-weighted total return of its assets
and that of the S&P 500 Index. A correlation of 100% would mean the total return
of the S&P 500 Portfolio's assets would increase and decrease exactly the same
as the S&P 500 Index.
Principal Risks
Market Risk: The value of an investment in the Premier S&P 500 Fund depends to a
great extent upon changes in market conditions. Equity securities have greater
price volatility than fixed-income securities and the value of the equity
securities held by the Premier S&P 500 Fund (through its investments in the S&P
500 Portfolio) will fluctuate as the market price of those securities rise and
fall. The performance per share of the Premier S&P 500 Fund will change daily
based on many factors, including the volatility of the securities in the S&P 500
Index, national and international economic conditions, and general market
conditions.
Index-Fund Risk: The Premier S&P 500 Fund is not actively managed through
traditional methods of stock selection and invests (through its investments in
the S&P 500 Portfolio) in the stocks included in the S&P 500 Index regardless of
their investment merits. Except to a limited extent, the Premier S&P 500 Fund
cannot modify its investment strategies to respond to changes in the economy and
may be particularly susceptible to a general decline in the U.S. stock market
segment relating to the S&P 500 Index.
The Premier S&P 500 Fund's ability to track the performance of the S&P 500 Index
may also be affected by, among other things, transaction costs, the fees and
expenses of the Premier S&P 500 Fund and the S&P 500 Portfolio, changes in the
composition of the S&P 500 Index or the assets of the S&P 500 Portfolio, and the
timing, frequency and amount of investor purchases and redemptions of both the
Premier S&P 500 Fund and S&P 500 Portfolio. Because the S&P 500 Portfolio seeks
to track the performance of the S&P 500 Index, the S&P 500 Portfolio will not
attempt to judge the merits of any particular stock as an investment.
In addition, the S&P 500 Portfolio will need to maintain cash balances to pay
redemptions and expenses, which may affect the overall performance of the
Premier S&P 500 Fund.
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The X.com U.S.A. Bond Fund
Investment Objective
The X.com U.S.A. Bond Fund (the "U.S.A. Bond Fund") seeks to approximate as
closely as practicable, before fees and expenses, the total rate of return of
the U.S. market for issued and outstanding U.S. government and high-grade
corporate bonds as measured by the LB Bond Index. The LB Bond Index includes
approximately 6,500 fixed-income securities, including U.S. Government
securities and investment grade corporate bonds, each with an outstanding market
value of at least $25 million and remaining maturity of greater than one year.
Principal Strategies
The U.S.A. Bond Fund does not invest directly in a portfolio of securities.
Instead, it seeks to achieve its investment objective by investing all of its
assets in the Bond Index Master Portfolio ("Bond Portfolio"), a series of MIP.
The Bond Portfolio seeks to replicate the total return of the LB Bond Index. To
do so, the Bond Portfolio invests substantially all of its assets in a
representative sample of the securities that comprise the LB Bond Index, or
securities or other instruments that seek to approximate the performance and
investment characteristics of the LB Bond Index. Generally, at least 65% of the
Bond Portfolio's total assets will be invested in fixed-income securities.
Securities are selected for investment by the Bond Portfolio based on a number
of factors, including, among others, the relative proportion of such securities
in the LB Bond Index, credit quality, issuer sector, maturity structure, coupon
rates, and callability.
Under normal market conditions, the Bond Portfolio invests at least 90% of its
total assets in securities that are believed to represent the investment
characteristics of the LB Bond Index. The Bond Portfolio attempts to achieve, in
both rising and falling markets, a correlation of at least 95% between the total
return of its net assets and that of the LB Bond Index. A correlation of 100%
would mean the total return of the Bond Portfolio's assets would increase and
decrease exactly the same as the LB Bond Index.
Principal Risks
Index Fund Risk: The U.S.A. Bond Fund is not actively managed through
traditional methods of securities selection and invests (through its investment
in the Bond Portfolio) in the fixed-income securities included in the LB Bond
Index regardless of their investment merit. Except to a limited extent, the
U.S.A. Bond Fund cannot modify its investment strategies to respond to changes
in the economy and may be particularly susceptible to a general decline in the
U.S. fixed-income market segment relating to the LB Bond Index.
The investment adviser of the Bond Portfolio seeks to replicate the performance
of the LB Bond Index by investing in a representative sample of the securities
that comprise the LB Bond Index. This representative sample, however, may not
match the overall performance of the LB Bond Index.
The U.S.A. Bond Fund's ability to track the performance of the LB Bond Index may
be affected by, among other things, transaction costs, the fees and expenses of
the U.S.A. Bond Fund and the
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Bond Portfolio, the manner in which the total
return of the LB Bond Index is calculated, the size of the Bond Portfolio, and
the timing, frequency and amount of investor purchases and redemptions of both
the U.S.A. Bond Fund and the Bond Portfolio. Because the Bond Portfolio seeks to
track the performance of the LB Bond Index, the Bond Portfolio will not attempt
to judge the merits of any particular fixed income security included in the LB
Bond Index as an investment.
Interest Rate Risk: The debt instruments in which the U.S.A. Bond Fund (through
its investments in the Bond Portfolio) invests are subject to interest rate
risk. Interest rate risk is the risk that when interest rates rise the value of
the debt instruments in which the Bond Portfolio invests will go down. When
interest rates fall, the value of the Bond Portfolio's investments may rise.
Credit Risk: Credit risk is the risk that issuers of the debt instruments in
which the U.S.A. Bond Fund (through its investments in the Bond Portfolio) may
invest may default on the payment of principal and/or interest. The U.S.A. Bond
Fund could lose money if the issuer of a fixed-income security owned by the Bond
Portfolio is unable or unwilling to meet its financial obligations by making
timely principal and/or interest payments. Investment-grade securities that are
rated BBB by S&P or an equivalent rating by any other nationally recognized
statistical rating organization ("NRSRO") are somewhat riskier than higher rated
obligations because they are regarded as having only an adequate capacity to pay
principal and interest, are considered to lack outstanding investment
characteristics, and may be speculative.
Market Risk: The market prices of securities held by the Bond Portfolio may fall
in response to national and international economic or general market conditions.
In addition, the Bond Portfolio will need to maintain cash balances to pay
redemptions and expenses, which may affect the overall performance of the U.S.A.
Bond Fund.
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The X.com U.S.A. Money Market Fund
Investment Objectives/Goals
The X.com U.S.A. Money Market Fund (the "U.S.A. Money Market Fund") seeks to
provide shareholders of the Fund with a high level of current income, while
preserving capital and liquidity, by investing in high-quality short-term
investments.
Principal Strategies
The U.S.A. Money Market Fund seeks to achieve this investment objective by
investing all of its assets in the Money Market Portfolio ("Money Market
Portfolio"), a series of MIP, which, in turn, invests its assets in U.S.
dollar-denominated, high-quality money market instruments with maturities of 397
days or less, and a dollar-weighted average portfolio maturity of 90 days or
less. The Money Market Portfolio investments include obligations of the U.S.
Government, its agencies and instrumentalities (including government-sponsored
enterprises), and high quality debt obligations such as obligations of domestic
and foreign banks, commercial paper, corporate notes and repurchase agreements
that represent minimal credit risk.
"High quality" investments are investments rated in the top two rating
categories by the requisite NRSRO or, if unrated, determined to be of comparable
quality to such rated securities by BGFA, the investment adviser of the Money
Market Portfolio, under guidelines adopted by the Fund's Board of Trustees and
the Money Market Portfolio's Board of Trustees.
Principal Risks
Although the U.S.A. Money Market Fund seeks to preserve the value of your
investment at $1 per share, the Fund can offer no guarantee that it will be able
to do so. It is possible to lose money by investing in the Fund.
Interest Rate Risk: The debt instruments in which the U.S.A. Money Market Fund
invests (through its investments in the Money Market Portfolio) are subject to
interest rate risk. Interest rate risk is the risk that when interest rates rise
the value of the debt instruments in which the Money Market Portfolio invests
will go down. Conversely, if interest rates fall, the value of the Money Market
Portfolio's investments may rise.
Credit Risk: Credit risk is the risk that issuers of the debt instruments in
which the U.S.A. Money Market Fund (through its investments in the Money Market
Portfolio) invests may default on the payment of principal and/or interest. The
U.S.A. Money Market Fund could be unable to maintain a stable net asset value of
$1.00 per share and the Fund could lose money if the issuer of a fixed-income
security owned by the Money Market Portfolio is unable or unwilling to meet its
financial obligations.
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PERFORMANCE INFORMATION
The bar charts on this page show the annual returns of each of the Funds and how
their performance has varied from year to year.(*) The average annual return
tables compare each Fund's average annual return with the return of a
corresponding index for one and five years and since inception. How the Funds
have performed in the past is not necessarily an indication of how the Funds
will perform in the future.
Premier S&P 500 Fund
1994 0.98% 1997 33.27%
1995 37.35% 1998 28.61%
1996 22.82%
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Premier S&P 500 Fund Average Annual Total Returns (As of December 31, 1998)
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One Year Five Years Since July 2, 1993
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Premier S&P 500 Fund 28.61% 23.89% 22.76%
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S&P 500 Index 28.58% 24.06% 22.95%
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U.S.A. Bond Fund
1994 - -3.53% 1997 10.00%
1995 19.03% 1998 9.57%
1996 2.36%
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U.S.A. Bond Fund Portfolio Average Annual Total Returns (As of December 31,
1998)
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One Year Five Years Since July 2, 1993
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U.S.A. Bond Fund 9.57% 7.11% 7.00%
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LB Bond Index 9.47% 7.30% 7.15%
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* The Funds did not offer shares to the public prior to November 18, 1999. Each
Fund's annual returns are based on the annual returns of each corresponding
Master Portfolio, but have not been adjusted to account for expenses payable at
the Fund level. As a result, the annual returns for the U.S.A. Bond Fund and
U.S.A. Money Market Fund would have been lower than those shown above because
the U.S.A. Bond Fund and U.S.A. Money Market Fund have higher expenses than
their corresponding portfolios. In contrast, because the Adviser does not charge
a fee for its services, reimburses the Premier S&P 500 Fund for all fees
incurred at the Master Portfolio level, and pays to the Premier S&P 500 Fund an
additional 0.01% of the Premier S&P 500 Fund's average daily net assets, the
annual returns for the Premier S&P 500 Fund would have been higher than those
shown above because it has lower expenses than the S&P 500 Portfolio.
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U.S.A. Money Market Fund
1994 4.38% 1997 5.78%
1995 6.11% 1998 5.71%
1996 5.55%
U.S.A. Money Market Fund Average Annual Total Returns (As of December 31, 1998)
- ------------------------- ---------- --------------- -----------------------
One Year Five Years Since July 2, 1993
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U.S.A. Money Market Fund 5.71% 5.50% 5.29%
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U.S. Treasury Bills 5.31% 5.32% 4.93%
(3-month)
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FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
U.S.A.
Shareholder Fees Premier Money
(fees paid directly from S&P 500 U.S.A. Bond Market
your investment) Fund Fund Fund
---- ---- ----
Maximum Sales Charge (Load)
Imposed on Purchases None None None
Maximum Deferred Sales Charge(Load) None None None
Maximum Sales Charge (Load) Imposed
in Reinvested Dividends and other
Distributions None None None
Redemption Fee
(within 90 days of purchase) None None None
Maximum Account Fee None $2.00 per None
(for accounts under $10,000) quarter(1)
Annual Fund Operating Expenses(2)
(expenses that are deducted from Fund assets)
Management Fees 0.28%(3) 0.40%(3) 0.60%(3)
Distribution (12b-1) Fees None None None
Other Expenses 0.00% 0.00% 0.00%
Total Annual Fund Operating Expenses 0.28% 0.40% 0.60%
Fee Waiver and Expense Reimbursement(4) 0.28% 0.21% 0.10%
Net Operating Expenses 0.00%(5) 0.19% 0.50%
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1 The maximum account fee for the U.S.A. Bond Fund will be deducted from your
quarterly distribution of the Funds' dividends. If your distribution is
less than the fee, fractional shares will be automatically redeemed to make
up the difference.
2 The cost reflects the expenses at both the Fund and the Portfolio levels.
3 Management fees include a fee equal to 0.05%, 0.08%, and 0.10% of the daily
net assets payable at the Portfolio level to the investment adviser for the
S&P 500 Portfolio, Bond Portfolio, and Money Market Portfolio,
respectively. Management fees also include a "unified" fee equal to 0.23%,
0.32% and 0.50% payable by the Premier S&P 500 Fund, U.S.A. Bond Fund, and
U.S.A. Money Market Fund, respectively, to X.com Asset Management, Inc.,
the Funds' investment adviser (the "Adviser"). Under the investment
advisory
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contract, the Adviser provides or arranges to be provided to the
Funds administration, transfer agency, pricing, custodial, auditing, and
legal services, and is responsible for payment of all of the operating
expenses of each Fund except the Portfolio management fees, brokerage fees,
taxes, interest and extraordinary expenses.
4 The fee waiver for each Fund is made pursuant to a written expense
limitation and reimbursement agreement, which is in effect for an initial
term of one year and will be renewed thereafter automatically for a one
year term on an annual basis. The agreement can be changed, terminated or
not renewed by either party only by giving 90 days' prior notice.
5 In addition to the reimbursement of expenses at the Master Portfolio level,
the Adviser will contribute to the Premier S&P 500 Fund an additional 0.01%
of the Premier S&P 500 Fund's average daily net assets.
Example
This Example is intended to help you compare the cost of investing in the Funds
with the cost of investing in other mutual funds. The Example assumes that:
o you invest $10,000 in each Fund for the time periods indicated;
o your investment has a 5% return each year;
o and each Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
Example 1 Year(*) 3 Years(*)
--------- ----------
Premier S&P 500 Fund $0(**) $61(+)
U.S.A. Bond Fund $19 $107
U.S.A. Money Market Fund $51 $182
* Reflects costs at both the Fund and Portfolio levels.
** In addition to the waiver of fees and reimbursement of expenses,
pursuant to a written agreement, X.com Asset Management, Inc., will
contribute to the Premier S&P 500 Fund an additional 0.01% of the
Premier S&P 500 Fund's average daily net assets.
+ X.com Asset Management, Inc. anticipates that the expense limitation
and reimbursement agreement will be renewed for each of the second and
third year of the Premier S&P 500 Fund's operation. If the agreement
is renewed, your actual cost will be $0.
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MORE ABOUT THE FUND'S INVESTMENT STRATEGIES AND RISKS
Investment Strategies
As with all mutual funds, there can be no assurance that the Funds will achieve
their respective investment objectives. The investment strategies of the Funds
are not fundamental and may be changed without approval of Fund shareholders. A
Fund may withdraw its investment in a Portfolio only if the Trust's Board of
Trustees determines that such action is in the best interests of the Fund and
its shareholders. If there is a change in the investment objective and
strategies of a Fund, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
The Premier S&P Index Fund and U.S.A. Bond Fund (the "Index Funds"): The
investment adviser of the S&P 500 Portfolio and the Bond Portfolio
(collectively, the "Index Portfolios") does not actively manage the assets of
each Portfolio, but seeks to achieve returns corresponding to the S&P 500 Index
and LB Bond Index, respectively. Instead, the Index Portfolios are managed by
utilizing an "indexing" investment approach to determine which securities are to
be purchased or sold to replicate, to the extent feasible, the investment
characteristics of the S&P 500 Index and the LB Bond Index through computerized,
quantitative techniques. The Index Portfolios cannot, as a practical matter, own
all the securities that make up their respective market indexes in perfect
correlation to the indexes. The Index Portfolios seek to track their respective
market indexes during down markets as well as during up markets. Consequently,
the returns of the Index Portfolios will be directly affected by the volatility
of the securities making up their respective market indexes.
Each Index Portfolio may invest up to 10% of its total assets in high quality
money market instruments to provide liquidity to meet redemption requests or to
facilitate investment in the stocks in the S&P 500 Index.
Each Index Portfolio may use derivative instruments in order to: (i) simulate
full investment in its corresponding index while retaining a cash balance for
portfolio management purposes; (ii) facilitate trading; (iii) reduce transaction
costs; or (iv) seek higher investment returns when such instruments are priced
more attractively than the stocks in its corresponding index. Such derivatives
include the purchase and sale of futures contracts and options on S&P 500 Index
futures contracts.
The U.S.A. Money Market Fund: The U.S.A. Money Market Fund and Money Market
Portfolio emphasize safety of principal and high credit quality. In particular,
the investment policies of the Fund and Portfolio prohibit the purchase of many
types of floating-rate instruments, commonly referred to as derivatives, that
are considered to be potentially volatile. The Money Market Portfolio, however,
may invest in high-quality asset-backed securities and variable and floating
rate obligations, which are considered to be derivative instruments. The U.S.A.
Money Market Fund (through its investments in the Money Market Portfolio) may
only invest in floating-rate securities that bear interest at a rate that resets
quarterly or more frequently, and that resets based on changes in standard money
market rate indices such as U.S. Government Treasury bills and
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London Interbank Offered Rate, among others. Floating and variable rate
instruments are subject to interest rate and credit risks.
Investment Risks
An investment in the Funds is subject to investment risks, including the loss of
the principal amount invested. The performance per share of the Funds and
Portfolios will change daily based on many factors, including, but not limited
to, the quality of the instruments held by each Portfolio, national and
international economic conditions and general market conditions.
Derivatives: Derivatives are financial instruments whose values are derived, at
least in part, from prices of other securities or specified assets, indices, or
rates. The use of derivative instruments is a highly specialized activity and
there can be no guarantee that their use will increase the return of the Funds,
or protect their assets from declining in value. The Funds' investments in
derivative instruments can significantly increase their exposure to market risk
or the credit risk of the counterparty. Derivative instruments can also involve
the risk of mispricing or improper valuation and the risk that changes in the
value of the derivative instruments may not correlate perfectly with the Funds'
corresponding indexes. In fact, the use of derivative instruments adversely
impact the value of the Funds' assets, which may reduce the return you receive
on your investment.
The Index Funds use of derivative instruments may affect the Funds' ability to
track their respective indexes less closely if the derivatives do not perform as
expected, or if the derivative instruments are timed incorrectly or are executed
under adverse market conditions.
The Money Market Portfolio may invest in high-quality asset-backed securities.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly, thus
in effect "passing through" monthly payments made by the individual borrowers on
the assets that underlie the securities. The value of these instruments are
particularly sensitive to changes in interest rate and general market
conditions. The value of asset-backed securities is also affected by the
creditworthiness of the individual borrowers.
Securities Lending: Each Portfolio in which the Funds invest may lend a portion
of their securities to certain financial institutions in order to earn income.
These loans are fully collateralized. However, if the institution defaults, the
Funds' performance could be reduced.
Year 2000: Like other mutual funds, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by their investment adviser, the Funds' other service
providers, or persons with whom they deal, do not properly process and calculate
date-related information and data on and after January 1, 2000. This possibility
is commonly known as the "Year 2000 Problem." Virtually all operations of the
Funds are computer reliant. The Funds' and the investment adviser are currently
Year 2000 compliant, and the service providers to the Funds and the Portfolios
have indicated that they are or expect to be Year 2000 compliant. There can, of
course, be no assurance that the Funds or the Portfolios will not experience any
problems as a result of the Year 2000 Problem. In addition, because the Year
2000 Problem affects virtually all organizations, the companies or entities in
which each of the Portfolios invest also could be adversely impacted by the Year
2000 Problem,
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especially foreign entities, which may be less prepared for the
Year 2000.
The extent of such impact cannot be predicted.
FUND MANAGEMENT
Investment Advisers. Under investment advisory agreements with the Funds, X.com
Asset Management, Inc. (the "Adviser"), a registered investment adviser,
provides investment advisory services to the Funds. The Adviser is a wholly
owned subsidiary of X.com and is located at 394 University Avenue, Palo Alto, CA
94301. The Adviser is newly formed and therefore has no prior experience as an
investment adviser.
X.com is the direct parent company of the Adviser. X.com is dedicated to
providing easy, low-cost financial services to on-line investors through its
continuous emphasis on technology. Through the world wide web, X.com offers
access to your X.com Funds account virtually anywhere, at any time.
Subject to general supervision of the X.com Funds' Board of Trustees and in
accordance with the investment objective, policies and restrictions of each of
the Funds, the Adviser provides the Funds with ongoing investment guidance,
policy direction and monitoring of each of the Portfolios in which each Fund
invests. The Adviser may in the future manage cash and money market instruments
for cash flow purposes. The Adviser also provides or arranges for
administration, transfer agency, custody and all other services necessary for
the Funds to operate. For its advisory services, each Fund pays the Adviser an
investment advisory fee at an annual rate, after fee waivers and expense
reimbursements, equal to the following percentage of each Fund's average daily
net assets:
After Fee Waiver and
Fund Contractual Rate Expense Reimbursement
---- ---------------- ---------------------
(expressed as a
(expressed as a percentage of
percentage of average average daily net
daily net assets) assets)
Premier S&P 500 Fund 0.23% 0.00%*
U.S.A. Bond Fund 0.32% 0.11%*
U.S.A. Money Market Fund 0.50% 0.40%*
*The Adviser has entered into a written expense limitation and reimbursement
agreement with the Trust, under which it has agreed to waive a percentage of its
advisory fee received from the Funds. The expense limitation and reimbursement
agreement is in effect for an initial term of one year and will be renewed
thereafter automatically for one year terms on an annual basis. The agreement
can be changed, terminated or not renewed by either party only upon providing 90
days' prior notice.
Out of the fee received by the Adviser, the Adviser pays all expenses of
managing and operating the Funds except brokerage expenses, taxes, interest,
fees and expenses of the independent trustees (including legal counsel fees),
and extraordinary expenses. A portion of the advisory fee may be paid by the
Adviser to unaffiliated third parties who provide recordkeeping and
administrative services that would otherwise be performed by an affiliate of the
Adviser.
15
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Barclays Global Fund Advisors ("BGFA") is the investment adviser for each
Portfolio. BGFA is a direct subsidiary of Barclays Global Investors, N.A.
(which, in turn, is an indirect subsidiary of Barclays Bank PLC) and is located
at 45 Fremont Street, San Francisco, California 94105. BGFA has provided asset
management, administration and advisory services for over 25 years. As of June
30, 1999, BGFA and its affiliates provided investment advisory services for over
$687 billion of assets. BGFA receives a fee from each Portfolio at an annual
rate equal to the following percentage of each Portfolio's average daily net
assets:
Percentage of
Portfolio Average Daily Net Assets
--------- ------------------------
S&P 500 Portfolio 0.05%*
Bond Portfolio 0.08%
U.S.A. Money Market Portfolio 0.10%
*The Adviser has entered into a written expense limitation and reimbursement
agreement with the Trust, under which it has agreed to reimburse the Premier S&P
500 Fund for all fees incurred at the Portfolio level. The agreement can be
changed, terminated or not renewed by either party only upon providing 90 day's
prior notice.
Each Fund bears a pro rata portion of the investment advisory fees paid by its
corresponding Portfolio, as well as certain other fees paid by each Portfolio,
such as accounting, legal, and Securities and Exchange Commission ("SEC")
registration fees.
- --------------------------------------------------------------------------------
PREMIER. The Adviser has entered into a written expense limitation agreement,
under which it has agreed to (i) waive all management fees received from the
Premier S&P 500 Fund; (ii) reimburse the Premier S&P 500 Fund for all fees
incurred by the Premier S&P 500 Fund at the Portfolio level; and (iii) in
addition to this waiver and reimbursement, pay the Premier S&P 500 Fund an
additional 0.01% of the Premier S&P 500 Fund's average daily net assets.
The Adviser may extend, but may not during term of the expense limitation
agreement shorten, the duration of the expense waiver or reimbursement. The
expense limitation agreement is in effect for an initial term of one year, and
will be renewed thereafter automatically for one year terms on an annual basis.
The expense limitation agreement may be changed, terminated or not renewed by
either party only upon 90 days' prior written notice (by e-mail or other means),
to the other party at its principal place of business.
- --------------------------------------------------------------------------------
The Funds' Statement of Additional Information contains detailed information
about the Fund's investment adviser, administrator, and other service providers.
THE FUNDS' STRUCTURE
Each Fund is a separate series of X.com Funds. The Premier S&P 500 Fund, U.S.A.
Bond Fund, and U.S.A. Money Market Fund seek to achieve their investment
objectives by investing all of each Fund's assets in the S&P 500 Portfolio, the
Bond Portfolio, and the Money Market Portfolio, respectively. The Index
Portfolios and Money Market Portfolio are each a series of
16
<PAGE>
MIP, a separate open-end investment company with the same investment objective
as the corresponding Fund. This two-tier fund structure is commonly referred to
as a "master/feeder" structure because one fund (the "feeder" fund) invests all
of its assets in a second fund (the "master fund"). In addition to selling its
shares to the Fund, each corresponding Portfolio has sold and is expected to
continue to sell its shares to certain other mutual funds or other accredited
investors. The expenses paid by these mutual funds and accredited investors may
differ from the expenses paid by a Fund; consequently, the returns received by
shareholders of other mutual funds or other accredited investors may differ from
those received by shareholders of the Fund.
The X.com Funds' Board of Trustees (the "Board") believes that, as other
investors invest their assets in the Portfolios, certain economic efficiencies
may be realized with respect to each Portfolio. For example, fixed expenses that
otherwise would have been borne solely by a Fund (and the other existing
interest-holders in its corresponding Portfolio) would be spread across a larger
asset base as more funds or other accredited investors invest in the particular
Portfolio. However, if a mutual fund or other investor withdraws its investment
from a Portfolio, the economic efficiencies (e.g., spreading fixed expenses
across a larger asset base) that the Board believes should be available through
investment in a Portfolio may not be fully achieved or maintained.
Each Fund may be asked to vote on matters concerning the Portfolio. Except as
permitted by the SEC, whenever a Fund is requested to vote on a matter
pertaining to a Portfolio, that Fund will hold a meeting of its shareholders,
and, at the meeting of investors in the Portfolio, will cast all of its votes in
the same proportion as the votes of the Fund's shareholders.
Each Fund may withdraw its investments in its corresponding Portfolio if the
Board determines that it is in the best interests of the Fund and its
shareholders to do so. Upon any such withdrawal, the Board would consider what
action might be taken, including the investment of all the assets of the Fund in
another pooled investment entity having the same investment objective as the
Fund, direct management of the Fund or other pooled investment entity by the
Adviser or the hiring of a sub-adviser to manage the Fund's assets.
Investment of the Funds' assets in the Portfolios is not a fundamental policy of
the Funds and a shareholder vote is not required for a Fund to withdraw its
investment from a Portfolio.
PRICING OF FUND SHARES
The Funds are true no-load funds, which means you may buy or sell shares
directly at the net asset value ("NAV") determined after the Fund receives your
request in proper form. A request is received in proper form if it is placed
through your Bank account and specifies the number of shares or dollar amount of
shares to be purchased or redeemed. If the Fund receives such request prior to
the close of the New York Stock Exchange, Inc. ("NYSE") on a day on which the
NYSE is open, your share price will be the NAV determined that day. Shares will
not be priced on the days on which the NYSE is closed for trading.
Each Fund's investment in its corresponding Portfolio is valued based on the
Fund's ownership interest in the net assets of the Master Portfolio. A Fund's
NAV per share is calculated by taking
17
<PAGE>
the value of each Fund's net assets and dividing by the number of shares
outstanding. Expenses are accrued daily and applied when determining the Fund's
NAV. The NAV for each Fund is determined as of the close of trading on the floor
of the NYSE (generally 4:00 p.m., Eastern Time), each day the NYSE is open. Each
Fund reserves the right to change the time at which purchases and redemptions
are priced if the NYSE closes at a time other than 4:00 p.m. Eastern Time or if
an emergency exists. The NYSE is closed on national holidays and on Good Friday.
Each Portfolio calculates its NAV on the same day and at the same time as its
corresponding Fund. Each Portfolio's investments are valued each day the NYSE is
open for business. Each Index Portfolio's assets are valued generally by using
available market quotations or at fair value as determined in good faith by the
Board of Directors of MIP. Bonds and notes with remaining maturities of 60 days
or less are valued at amortized cost. The Money Market Portfolio values its
securities at amortized cost to account for any premiums or discounts above or
below the face value of the securities it buys. The amortized cost method does
not reflect daily fluctuations in market value.
HOW TO BUY AND SELL SHARES OF THE X.COM FUNDS
The Funds are available only to on-line investors that have established a
customer relationship with X.com and opened an account with the Bank, which is
under contract to provide X.com customers with various banking and financial
services.
On-Line Investor Requirements
The Funds are designed and built specifically for on-line investors. Each Fund
requires its shareholders to consent to receive all shareholder information
about the Fund electronically. Shareholder information includes, but is not
limited to, prospectuses, financial reports, confirmations, proxy solicitations,
and financial statements. Shareholders may also receive other correspondence
from X.com Funds or the Bank through their e-mail account. By purchasing shares
of the Fund, you certify that you have access to the Internet and a current
e-mail account, and you acknowledge that you have the sole responsibility for
providing a correct and operational e-mail address. You may incur costs for
on-line access to shareholder documents and maintaining an e-mail account.
If you rescind your consent to receive shareholder information electronically,
fail to maintain an e-mail account, or close your account, the Funds may, to the
extent permitted by the federal securities laws, redeem your position in the
Funds and, in any event, will prohibit additional investments in the Funds,
including the reinvestment of dividends.* Prior to revoking your consent, you
will be reminded of the Fund's involuntary redemption policy. If the Funds
involuntarily redeem your shares, you may experience adverse tax consequences.
If your shares are involuntarily redeemed, you will receive paper copies of all
shareholder information until all of your shares have been redeemed and the
proceeds have been credited to your account, or you
* The Staff has informally indicated its view that the Funds may not voluntarily
redeem your shares if you revoke your consent to receive shareholder documents
electronically or fail to maintain an e-mail account. However, should the
Staff's position on this issue change, the Funds intend to involuntarily redeem
your shares under such circumstances.
18
<PAGE>
have otherwise received the redemption proceeds. The Fund reserves the right to
deliver paper-based documents in certain circumstances, at no cost to the
investor.
Account Requirements
To register as a customer of X.com and open an account with the Bank, you must
complete and submit an X.com Financial Services Account Application (the
"Application"). The Application is available on the X.com website at www.X.com.
While you may submit the Application electronically, you must also complete,
sign and deliver a signature card. The signature card will be sent to your
address of record and must be returned promptly per the enclosed instructions.
For more detailed information on how to open an account with the Bank, visit the
X.com website (www.X.com).
Once you open your account, you will be subject to general account requirements
as described in the Application, and will have access to all the electronic
financial services offered over the Internet by X.com, including the opportunity
to invest in X.com Funds.
Placing an Order
You can begin purchasing shares of the Funds as soon as you open and fund your
account. Because a Fund's net asset value changes daily, your purchase price
will be the next NAV determined after a Fund receives and accepts your purchase
order.
You can place orders to purchase or redeem Fund shares by accessing our website
at www.X.com. At the time you log-on to the website, you will be prompted to
enter your personal identification password so that we can be sure each
transaction is secure. By clicking on the appropriate mutual fund order buttons,
you can quickly and easily place an order to purchase or redeem shares in a
Fund. When you first purchase shares in a Fund, you will be asked: (1) to
consent to receive all Fund documentation electronically; and (2) to affirm that
you have read the prospectus. The prospectus is readily available for viewing
and printing on our website. If you do not consent to receive all Fund
documentation electronically you will not be able to purchase shares of the
Fund. To complete a purchase transaction, you must transfer sufficient funds
from your X.com bank account to your mutual fund account. Notice of trade
confirmations will be sent electronically to the e-mail address you provided
when you opened your account.
19
<PAGE>
Minimum Investment Requirements
For your initial investment in a Fund $0
To buy additional shares of a Fund $0
Continuing minimum investment $0
To invest in a Fund for your IRA, Roth IRA, $0
or one-person SEP account
To invest in a Fund for your Education IRA account $0
To invest in a Fund for your UGMA/UTMA account $0
To invest in a Fund for your SIMPLE, SEP-IRA, Profit Sharing or Money $0
Purchase Pension Plan, or 401(k) account
Maximum Investment Limitations (For the Premier S&P 500 Fund Only)
Your investment in the Premier S&P 500 Fund will be limited to a total amount of
$15,000. For investors that also have established a direct deposit account with
the Bank, the maximum investment will be $50,000. The Premier S&P 500 Fund will
inform you when your investment reaches or exceeds the aggregate limit. The
Premier S&P 500 Fund will promptly credit any excess money received from you to
your U.S.A. Money Market Fund account.
After your account is established you may use any of the methods described below
to buy or sell shares. You can only sell shares of the Funds that you own; that
means you cannot "short" shares of the Fund.
Accessing Account Information
For information on how to access account information and/or applications
electronically, please refer to our online assistant at www.X.com available 24
hours a day.
Redemptions
You can access the money you have invested in a Fund at any time by selling some
or all of your shares back to the Fund. As soon as a Fund receives your
redemption request, your shares will be redeemed and the proceeds will be
credited to your account with the Bank. This usually occurs the business day
following the transaction. All redemption proceeds will be credited to your Bank
account.
Redemption Delays. You will have to wait to receive payment on redeemed shares
until the funds you used to buy the shares have cleared (e.g., if you opened
your Bank account with a check, until your check has cleared). The delay may
take up to fifteen (15) days from the date of purchase.
20
<PAGE>
The right of redemption may be suspended during any period in which (i) trading
on the NYSE is restricted, as determined by the SEC, or the NYSE is closed for
other than weekends and holidays; (ii) the SEC has permitted such suspension by
order; or (iii) an emergency as determined by the SEC exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
Redemption Fee. The Funds do not impose a redemption fee. The Index Funds can
experience substantial price fluctuations and are intended for long-term
investors. Short-term "market timers" who engage in frequent purchases and
redemptions can disrupt a Fund's investment program and create additional
transaction costs that are borne by all shareholders. For these reasons, in the
future the Index Funds may assess a 2.0% fee on redemptions of shares held for
less than 90 days.
Amending Your Application
For your protection, you will be required to submit an amended Application if
you desire to change certain information provided on your initial Application.
The amended Application is designed to protect you and the Funds against
fraudulent transactions by unauthorized persons. Specifically, the Funds will
require you to amend your Application in the following instances:
1. If you transfer the ownership of your account to another individual
or organization.
2. If you add or change your name or add or remove an owner on your
account.
3. If you add or change the beneficiary on your transfer-on-death account.
Closing your account
If you close your account with the Bank, the Fund may, to the extent permitted
by the federal securities laws, redeem all of your shares in your Fund account.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Premier S&P 500 Fund intends to pay dividends from net investment income
quarterly and distribute capital gains, if any, annually. The U.S.A. Bond Fund
and U.S.A. Money Market Fund intend to declare dividends daily and distribute
them monthly. The U.S.A. Bond Fund and U.S.A. Money Market Fund will distribute
capital gains, if any, at least annually. The Funds may make additional
distributions if necessary.
Unless you choose otherwise, all your dividends and capital gain distributions
will be automatically reinvested in additional Fund shares. Shares are purchased
at the net asset value determined on the reinvestment date. If you revoke your
consent to receive shareholder information electronically, fail to maintain an
e-mail account, or close your account, you will not be permitted to reinvest
your dividends in additional Fund shares.
21
<PAGE>
TAX CONSEQUENCES
The following information is meant as a general summary for U.S. taxpayers.
Please see the Funds' Statement of Additional Information for more information.
You should rely on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Funds.
Each Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they receive.
The Premier S&P 500 Fund will distribute substantially all of its income and
gains to its shareholders every year. The U.S.A. Bond Fund and U.S.A. Money
Market Fund will distribute dividends monthly. If a Fund declares a dividend in
October, November or December but pays it in January, you may be taxed on the
dividend as if you received it in the previous year.
You will generally be taxed on dividends you receive from a Fund, regardless of
whether they are paid to you in cash or are reinvested in additional Fund
shares. If a Fund designates a dividend as a capital gain distribution, you will
pay tax on that dividend at the long-term capital gains tax rate, no matter how
long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax advisor about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you paid for the shares, how much you sold
them for, and how long you held them.
Each Fund will send you a tax report each year that will tell you which
dividends must be treated as ordinary income and which (if any) are long-term
capital gain.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to you if you fail
to provide the Fund with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax, but
is a method in which the IRS ensures that it will collect taxes otherwise due.
Any amounts withheld may be credited against your U.S. federal income tax
liability.
22
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Funds ("SAI"), contains further
information about each Fund. The SAI is incorporated into this Prospectus by
reference (that means it is legally considered part of this Prospectus).
Additional information about the Funds' investments will be available in the
Funds' annual and semi-annual reports to shareholders. In a Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its fiscal
year.
Additional information including the SAI and the most recent annual and
semi-annual reports (when available), may be obtained without charge at our
website (www.X.com). Shareholders will be alerted by e-mail when a prospectus
amendment, annual or semi-annual report is available. Shareholders may also call
the toll-free number listed below for additional information or with any
inquiries.
Further information about the Funds (including the SAI) can also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. You may call
1-800-SEC-0330 for information about the operations of the public reference
room. Reports and other information about the Funds are also available on the
SEC's website (http://www.sec.gov) or copies can be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
X.com Corp.
394 University Avenue
Palo Alto, CA 94301
Toll-Free: (888) 447-8999
http://www.X.com
Investment Company Act file No.: 811-09381
23
STATEMENT OF ADDITIONAL INFORMATION
X.com Funds
X.com Premier S&P 500 Fund
X.com U.S.A. Bond Fund
X.com U.S.A. Money Market Fund
November 18, 1999
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the Prospectus for the X.com Premier S&P 500 Fund
(the "Premier S&P 500 Fund"), the X.com U.S.A. Bond Fund (the "U.S.A. Bond
Fund"; collectively with the Premier S&P 500 Fund, the "Index Funds"), and the
X.com U.S.A. Money Market Fund (the "U.S.A. Money Market Fund"; collectively
with the Index Funds, the "Funds") dated November 18, 1999 (as amended from time
to time).
To obtain a copy of the Funds' Prospectus and the Funds' most recent
shareholders' report (when issued) free of charge, please access our Website
online (www.X.com) via e-mail. The Funds are for on-line investors that are
customers of First Western National Bank, which X.com Corporation ("X.com") has
agreed to acquire subject to regulatory and shareholder approval and with which
X.com has contracted to provide various financial services for its customers
(the "Bank"). Only investors who are customers of the Bank and who consent to
receive all information about the Funds electronically may invest in any of the
Funds.
<PAGE>
TABLE OF CONTENTS
Page
HISTORY OF THE FUNDS...........................................................1
THE FUNDS......................................................................1
INVESTMENT STRATEGIES AND RISKS................................................2
FUND POLICIES.................................................................13
TRUSTEES AND OFFICERS.........................................................20
INVESTMENT MANAGEMENT.........................................................22
SERVICE PROVIDERS.............................................................24
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION................................26
ORGANIZATION, DIVIDEND AND VOTING RIGHTS......................................27
SHAREHOLDER INFORMATION.......................................................28
TAXATION......................................................................29
MASTER PORTFOLIO ORGANIZATION.................................................33
PERFORMANCE INFORMATION.......................................................35
FINANCIAL STATEMENTS..........................................................40
APPENDIX......................................................................41
<PAGE>
HISTORY OF THE FUNDS
Each of the Funds is a diversified series of X.com Funds (the "Trust"). The
Trust is organized as a Delaware business trust and was formed on June 7, 1999.
THE FUNDS
Each of the Funds is classified as a diversified open-end, management investment
company.
Premier S&P 500 Fund. As its investment objective, the Premier S&P 500 Fund
seeks to approximate as closely as practicable, before fees and expenses, the
capitalization-weighted total rate of return(1) of Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index")(2). The S&P 500 Index, a
widely recognized benchmark for U.S. stocks, currently represents about 75% of
the market capitalization of all publicly traded common stocks in the United
States. The S&P 500 Index includes 500 established companies representing
different sectors of the U.S. economy (including industrial, utilities,
financial, and transportation) selected by Standard & Poor's. The Premier S&P
500 Fund seeks to achieve its objective by investing in S&P 500 Index Master
Portfolio ("S&P 500 Portfolio"), a series of Master Investment Portfolio
("MIP"), a registered open-end management investment company issuing shares in
multiple series (each a "Portfolio"). The S&P 500 Portfolio seeks to provide
investment results that correspond (before fees and expenses) to the total
return of the publicly traded common stocks, in the aggregate, as represented by
the S&P 500 Index. To do so, the S&P 500 Portfolio invests substantially all of
its assets in the same stocks and in substantially the same percentages as the
S&P 500 Index.
- ----------------------
1 "Capitalization-weighted total rate of return" means that each stock in
the index contributes to the index in the same proportion as the value
of its shares. Thus, if the shares of Company A are worth twice as much
as the shares of Company B, Company A's return will count twice as much
as Company B's in calculating the index's overall return.
2 "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's
500(R)," and "500" are trademarks of The McGraw-Hill Companies, Inc.
and have been licensed by X.com Asset Management, Inc. for use in
connection with the Premier S&P 500 Fund. The Premier S&P 500 Fund is
not sponsored, endorsed, sold, or promoted by Standard & Poor's and
Standard & Poor's makes no representation regarding the advisability of
investing in the Premier S&P 500 Fund.
U.S.A. Bond Fund. As its investment objective, the U.S.A. Bond Fund seeks to
approximate as closely as practicable, before fees and expenses, the total rate
of return of the U.S. market for issued and outstanding U.S. government and
high-grade corporate bonds as measured by the Lehman Brothers
Government/Corporate Bond Index ("LB Bond Index"). The LB Bond Index includes
approximately 6,500 fixed-income securities,
<PAGE>
including U.S. Government securities and investment grade corporate bonds, each
with an outstanding market value of at least $25 million and remaining maturity
of greater than one year. seeks to achieve its investment objective by investing
all of its assets in the Bond Index Master Portfolio ("LB Bond Portfolio"), a
series of MIP. The LB Bond Portfolio seeks to replicate the total return of the
LB Bond Index. To do so, the LB Bond Portfolio invests substantially all of its
assets in a representative sample of the securities that comprise the LB Bond
Index, or securities or other instruments that seek to approximate the
performance and investment characteristics of the LB Bond Index.
U.S.A. Money Market Fund. As its investment objective, the U.S.A. Money Market
Fund seeks to provide shareholders of the Fund with a high level of current
income, while preserving capital and liquidity. The U.S.A. Money Market Fund
seeks to achieve this investment objective by investing all of its assets in the
Money Market Portfolio ("Money Market Portfolio"), a series of MIP, which, in
turn, invests its assets in U.S. dollar-denominated, high-quality money market
instruments with maturities of 397 days or less, and a dollar-weighted average
portfolio maturity of 90 days or less. The Money Market Portfolio, LB Bond
Portfolio and S&P 500 Portfolio are collectively referred to herein as the
"Portfolios".
Master Investment Portfolio. MIP is an open-end management investment company
organized as a Delaware business trust. The policy of each of the Funds to
invest all of its assets in a Portfolio of MIP is not a fundamental policy of
any of the Funds and a shareholder vote is not required for any Fund to withdraw
its investment from the Portfolio in which it invests.
The investment objective of each of the Funds is fundamental and, therefore,
cannot be changed without approval of a majority (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) of that Fund's outstanding
voting interests.
INVESTMENT STRATEGIES AND RISKS
Since each Fund invests all its assets in its corresponding Master Portfolio,
the investment characteristics and investment risks of a Fund correspond to
those of the Master Portfolio in which the Fund invests. The following
supplements the discussion in the Prospectus of the principal investment
strategies, policies and risks that pertain to the Portfolios and, accordingly,
to the Funds that invest in the Portfolios. In addition to discussing the
principal risks of investing in the Portfolios and the Funds, this section also
describes the non-principal risks of such investments. These investment
strategies and policies may be changed without shareholder approval unless
otherwise noted and apply to all of the Portfolios unless otherwise noted.
Futures Contracts and Options Transactions. The S&P 500 and LB Bond Portfolios
may use futures as a substitute for a comparable market position in the
underlying securities.
A futures contract is an agreement between two parties, a buyer and a seller, to
exchange
2
<PAGE>
a particular commodity or financial instrument at a specific price on a
specific date in the future. An option transaction generally involves a right,
which may or may not be exercised, to buy or sell a commodity or financial
instrument at a particular price on a specified future date. Futures contracts
and options are standardized and traded on exchanges, where the exchange serves
as the ultimate counterparty for all contracts. Consequently, the primary credit
risk on futures contracts is the creditworthiness of the exchange. Futures
contracts are subject to market risk (i.e., exposure to adverse price changes).
Upon exercise of an option on a futures contract, the writer of the option
delivers to the holder of the option the futures position and the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of options on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the relevant Portfolio.
Although the S&P 500 and LB Bond Portfolios intend to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting these Portfolios to substantial losses. If it is not possible, or if
a Portfolio determines not to close a futures position in anticipation of
adverse price movements, the Portfolio will be required to make daily cash
payments on variation margin.
The S&P 500 Portfolio may invest in stock index futures and options on stock
index futures as a substitute for a comparable market position in the underlying
securities. A stock index future obligates the seller to deliver (and the
purchaser to take), effectively, an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. With respect to stock indices that are permitted investments, the
Portfolios intend to purchase and sell futures contracts on the stock index for
which it can obtain the best price with consideration also given to liquidity.
There can be no assurance that a liquid market will exist at the time when the
S&P 500 Portfolio seeks to close out a futures contract or a futures option
position. Lack of a liquid market may prevent liquidation of an unfavorable
position.
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Interest-Rate Futures Contracts and Options on Interest-Rate Futures Contracts.
The LB Bond Portfolio may invest in interest-rate futures contracts and options
on interest-rate futures contracts as a substitute for a comparable market
position in the underlying securities. The LB Bond Portfolio may also sell
options on interest-rate futures contracts as part of closing purchase
transactions to terminate their options positions. No assurance can be given
that such closing transactions can be effected or the degree of correlation
between price movements in the options on interest rate futures or price
movements in the LB Bond Portfolio's securities which are the subject of the
transactions.
Interest-Rate and Index Swaps. The LB Bond Portfolio may enter into
interest-rate and index swaps in pursuit of its investment objectives.
Interest-rate swaps involve the exchange by the LB Bond Portfolio with another
party of their respective commitments to pay or receive interest (for example,
an exchange of floating-rate payments or fixed-rate payments). Index swaps
involve the exchange by the LB Bond Portfolio with another party of cash flows
based upon the performance of an index of securities or a portion of an index of
securities that usually include dividends or income. In each case, the exchange
commitments can involve payments to be made in the same currency or in different
currencies. The LB Bond Portfolio will usually enter into swaps on a net basis.
In so doing, the two payment streams are netted out, with the LB Bond Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. If the LB Bond Portfolio enters into a swap, it will maintain a
segregated account on a gross basis, unless the contract provides for a
segregated account on a net basis. If there is a default by the other party to
such a transaction, the LB Bond Portfolio will have contractual remedies
pursuant to the agreements related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. There is no limit, except as provided
below, on the amount of swap transactions that may be entered into by the LB
Bond Portfolio. These transactions generally do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps generally is limited to the net amount of principal.
Accordingly, the risk of loss with respect to swaps generally is limited to the
net amount of payments that the LB Bond Portfolio is contractually obligated to
make. There is also a risk of a default by the other party to a swap, in which
case the LB Bond Portfolio may not receive the net amount of payments that the
LB Bond Portfolio contractually is entitled to receive.
The S&P 500 and LB Bond Portfolios' futures transactions must constitute
permissible transactions pursuant to regulations promulgated by the Commodity
Futures Trading Commission ("CFTC"). In addition, these Portfolio may not engage
in futures transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired options on futures contracts, other than those
contracts entered into for bona fide hedging purposes, would exceed 5% of the
liquidation value of these Portfolios' assets, after taking into account
unrealized profits and unrealized losses on such contracts; provided, however,
that in the case of an option on a futures contract that is in-the-money
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at the time of purchase, the in-the-money amount may be excluded in calculating
the 5% liquidation limit. Pursuant to regulations and/or published positions of
the Securities and Exchange Commission ("SEC"), the S&P 500 and LB Bond
Portfolios may be required to segregate cash or high quality money market
instruments in connection with its futures transactions in an amount generally
equal to the entire value of the underlying security.
Future Developments. The S&P 500 and LB Bond Portfolios may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other derivative investments which are not presently
contemplated for use by such Portfolio or which are not currently available but
which may be developed, to the extent such opportunities are both consistent
with the respective Portfolio's investment objective and legally permissible for
that Portfolio. Before entering into such transactions or making any such
investment, the Index Funds will provide appropriate disclosure in their
prospectus.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions.
The Portfolios may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Portfolios will generally purchase securities with the intention of
acquiring them, the Portfolios may dispose of securities purchased on a
when-issued, delayed-delivery or a forward commitment basis before settlement
when deemed appropriate by the Portfolio's investment advisor.
When-issued securities are subject to market fluctuation, and no income accrues
to the purchaser during the period before the securities are paid for and
delivered on the settlement date. The purchase price and the interest rate that
will be received on debt securities are fixed at the time the purchaser enters
into the commitment.
Securities purchased on a when-issued or forward commitment basis may expose the
Portfolios to risk because they may experience fluctuations in value prior to
their actual delivery. Purchasing a security on a when-issued basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed-upon purchase price, in which case there could be an unrealized loss at
the time of delivery. None of the Portfolios currently intend on investing more
than 5% of its assets in when-issued securities during the coming year. Each of
the Portfolios will establish a segregated account in which it will maintain
cash or liquid securities in an amount at least equal in value to that
Portfolio's commitments to purchase when-issued securities. If the value of
these assets declines, that Portfolio will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments. Because the Money Market Portfolio will set
aside cash and other high quality liquid debt securities as described above, the
liquidity of the Money Market Portfolio's investment portfolio may decrease as
the proportion of securities in the Money Market Portfolio's portfolio purchased
on a when-issued or forward commitment basis increases.
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The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining the Money Market Portfolio's net
asset value starting on the day the Money Market Portfolio agrees to purchase
the securities. When the Money Market Portfolio makes a forward commitment to
sell securities it owns, the proceeds to be received upon settlement are not
reflected in the Money Market Portfolio's net asset value as long as the
commitment remains in effect.
Short-Term Instruments and Temporary Investments. Although the Money Market
Portfolio will primarily invest in money market instruments, the other
Portfolios may also invest in high-quality money market instruments on an
ongoing basis to provide liquidity or for temporary purposes when there is an
unexpected level of shareholder purchases or redemptions. The instruments in
which the Portfolios may invest include: (i) short-term obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (including
government-sponsored enterprises); (ii) negotiable certificates of deposit
("CDs"), banker's acceptances, fixed time deposits and other obligations of
domestic banks (including foreign branches) that have more than $1 billion in
total assets at the time of investment and that are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the FDIC; (iii) commercial paper rated at the date of
purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of
comparable quality as determined by Portfolio's investment advisor; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment have more than $10 billion, or
the equivalent in other currencies, in total assets and that, in the opinion of
the Portfolio's investment advisor, are of comparable quality to obligations of
U.S. banks which may be purchased by the Portfolios.
Bank Obligations. The Portfolios may invest in bank obligations, including
certificates of deposit, time deposits, banker's acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits which may be
held by the Portfolios will not benefit from insurance from the Bank Insurance
Fund or the Savings Association Insurance Fund administered by the Federal
Deposit Insurance Corporation. Banker's acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument upon maturity. The other short-term
obligations may include uninsured, direct obligations, bearing fixed, floating-
or variable-interest rates.
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Investments in foreign obligations involve certain considerations that are not
typically associated with investing in domestic obligations. There may be less
publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to uniform accounting,
auditing and financial reporting standards or governmental supervision
comparable to those applicable to domestic issuers. In addition, with respect to
certain foreign countries, taxes may be withheld at the source under foreign
income tax laws, and there is a possibility of expropriation or confiscatory
taxation, political or social instability or diplomatic developments that could
adversely affect investments in, the liquidity of, and the ability to enforce
contractual obligations with respect to, securities of issuers located in those
countries. The Money Market Portfolio may invest up to 25% of its assets in
foreign obligations.
Obligations of foreign banks and foreign branches of U.S. banks involve somewhat
different investment risks from those affecting obligations of U.S. banks,
including the possibilities that liquidity could be impaired because of future
political and economic developments; the obligations may be less marketable than
comparable obligations of U.S. banks; a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; foreign
deposits may be seized or nationalized; foreign governmental restrictions (such
as foreign exchange controls) may be adopted which might adversely affect the
payment of principal and interest on those obligations; and the selection of
those obligations may be more difficult because there may be less publicly
available information concerning foreign banks. In addition, the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to U.S. banks. In
that connection, foreign banks are not subject to examination by an U.S.
Government agency or instrumentality.
Commercial Paper and Short-Term Corporate Debt Instruments. In addition to the
Money Market Portfolio which will generally invest in these types of
instruments, the S&P 500 and LB Bond Portfolios may invest in commercial paper
(including variable amount master demand notes), which consists of short-term,
unsecured promissory notes issued by corporations to finance short-term credit
needs. Commercial paper is usually sold on a discount basis and has a maturity
at the time of issuance not exceeding nine months. Variable amount master demand
notes are demand obligations that permit the investment of fluctuating amounts
at varying market rates of interest pursuant to arrangements between the issuer
and a commercial bank acting as agent for the payee of such notes whereby both
parties have the right to vary the amount of the outstanding indebtedness on the
notes. The investment adviser to the Portfolios monitors on an ongoing basis the
ability of an issuer of a demand instrument to pay principal and interest on
demand.
The Portfolios also may invest in non-convertible corporate debt securities
(e.g., bonds and debentures) with not more than one year remaining to maturity
at the date of settlement. The Portfolios will invest only in such corporate
bonds and debentures that are rated at the time of purchase at least "Aa" by
Moody's or "AA" by S&P. Subsequent to its purchase by a Portfolio, an issuer of
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Portfolio. The investment adviser to the
Portfolios will consider such an event in determining whether a
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Portfolio should continue to hold the obligation. To the extent a Portfolio
continues to hold such obligations, it may be subject to additional risk of
default.
To the extent the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Portfolios will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in its Prospectus and in this SAI. The
ratings of Moody's and S&P and other nationally recognized statistical rating
organizations are more fully described in the attached Appendix.
Repurchase Agreements. All of the Portfolios may enter into a repurchase
agreement wherein the seller of a security to a Portfolio agrees to repurchase
that security from the Portfolio at a mutually-agreed upon time and price. The
period of maturity is usually quite short, often overnight or a few days,
although it may extend over a number of months. Each of the Portfolios may enter
into repurchase agreements only with respect to securities that could otherwise
be purchased by the respective Portfolio, including government securities and
mortgage-related securities, regardless of their remaining maturities, and
requires that additional securities be deposited with the custodian if the value
of the securities purchased should decrease below the repurchase price.
The Portfolios may incur a loss on a repurchase transaction if the seller
defaults and the value of the underlying collateral declines or is otherwise
limited or if receipt of the security or collateral is delayed. The Portfolio's
custodian has custody of, and holds in segregated accounts, securities acquired
as collateral by each of the Portfolios under a repurchase agreement. Repurchase
agreements are considered loans by the Portfolios. All repurchase transactions
must be 100% collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
the Portfolios limit investments in repurchase agreements to selected
creditworthy securities dealers or domestic banks or other recognized financial
institutions. The Portfolio's advisor monitors on an ongoing basis the value of
the collateral to assure that it always equals or exceeds the repurchase price.
Floating - and Variable-Rate Obligations. All of the Portfolios may purchase
floating-rate and variable-rate obligations as described in the Prospectus. The
Portfolios may purchase debt instruments with interest rates that are
periodically adjusted at specified intervals or whenever a benchmark rate or
index changes. These adjustments generally limit the increase or decrease in the
amount of interest received on the debt instruments. The Portfolios may purchase
floating- and variable-rate demand notes and bonds, which are obligations
ordinarily having stated maturities in excess of thirteen months, but which
permit the holder to demand payment of principal at any time, or at specified
intervals not exceeding thirteen months. Variable-rate demand notes include
master demand notes that are obligations that permit a Portfolio to invest
fluctuating amounts, which may change daily without penalty, pursuant to direct
arrangements between the Portfolio, as lender, and the borrower.
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Floating - and variable-rate instruments are subject to interest-rate risk and
credit risk. The issuer of such obligations ordinarily has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of day's notice to the holders of such obligations. The interest rate on
a floating-rate demand obligation is based on a known leading rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct lending arrangements between the lender and
borrower, it is not contemplated that such instruments generally will be traded,
and there generally is no established secondary market for these obligations,
although they are redeemable at face value. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, the
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and the Portfolios may invest in obligations which are
not so rated only if BGFA determines that at the time of investment the
obligations are of comparable quality to the other obligations in which that
Portfolio may invest. BGFA, on behalf of the Portfolios, considers on an ongoing
basis the creditworthiness of the issuers of the floating- and variable-rate
demand obligations in the Portfolios' portfolio. None of the Portfolios will
invest more than 10% of the value of its total net assets in floating- or
variable-rate demand obligations whose demand feature is not exercisable within
seven days. Such obligations may be treated as liquid, provided that an active
secondary market exists
Loans of Portfolio Securities. The S&P 500 and LB Bond Portfolios may lend
securities from their portfolios to brokers, dealers and financial institutions
(but not individuals) in order to increase the return on their portfolios. The
value of the loaned securities may not exceed one-third of the respective
Portfolio's total assets and loans of portfolio securities are fully
collateralized based on values that are marked-to-market daily. Neither of these
Portfolios will enter into any portfolio security lending arrangement having a
duration of longer than one year. The principal risk of portfolio lending is
potential default or insolvency of the borrower. In either of these cases, a
Portfolio could experience delays in recovering securities or collateral or
could lose all or part of the value of the loaned securities. The S&P 500 and LB
Bond Portfolios may pay reasonable administrative and custodial fees in
connection with loans of portfolio securities and may pay a portion of the
interest or fee earned thereon to the borrower or a placing broker.
The Money Market Portfolio may lend its securities to brokers, dealers and
financial institutions, provided (1) the loan is secured continuously by
collateral consisting of cash, U.S. Government securities or an irrevocable
letter of credit which is marked to market daily to ensure that each loan is
fully collateralized; (2) the Money Market Portfolio may at any time recall the
loan and obtain the return of the securities loaned within five business days;
(3) the Money Market Portfolio will receive any interest or dividends paid on
the securities loaned; and (4) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the Money Market
Portfolio. The Money
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Market Portfolio may earn income in connection with securities loans either
through the reinvestment of the cash collateral or the payment of fees by the
borrower. The Money Market Portfolio does not currently intend to lend its
portfolio securities.
In determining whether to lend a security to a particular broker, dealer or
financial institution, the Portfolio's investment advisor considers all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized and marked to market daily. The Portfolios will not
enter into any portfolio security lending arrangement having a duration of
longer than one year. Any securities that a Portfolio may receive as collateral
will not become part of the Portfolio's investment portfolio at the time of the
loan and, in the event of a default by the borrower, the Portfolio will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Portfolio is permitted to invest. During the time
securities are on loan, the borrower will pay the Portfolio any accrued income
on those securities, and the Portfolio may invest the cash collateral and earn
income or receive an agreed upon fee from a borrower that has delivered
cash-equivalent collateral.
Investment Company Securities. The S&P 500 and LB Bond Portfolios may invest in
securities issued by other open-end management investment companies which
principally invest in securities of the type in which such Portfolio invests.
Under the 1940 Act, a Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of that Portfolio's net assets with respect
to any one investment company and (iii) 10% of that Portfolio's net assets in
the aggregate. Investments in the securities of other investment companies
generally will involve duplication of advisory fees and certain other expenses.
These Portfolios may also purchase shares of exchange-listed closed-end funds.
Illiquid Securities. To the extent that such investments are consistent with its
respective investment objective, the S&P 500 and LB Bond Portfolios may invest
up to 15% of the value of their respective net assets in securities as to which
a liquid trading market does not exist. Such securities may include securities
that are not readily marketable, such as privately issued securities and other
securities that are subject to legal or contractual restrictions on resale,
floating- and variable-rate demand obligations as to which that Portfolio cannot
exercise a demand feature on not more than seven day's notice and as to which
there is no secondary market and repurchase agreements providing for settlement
more than seven days after notice.
Foreign Securities. Since the stocks of some foreign issuers may be included in
the S&P 500 Index, the S&P 500 Portfolio's portfolio may contain securities of
such foreign issuers, as well as American Depositary Receipts and similar
instruments, which may subject the S&P 500 Portfolio to additional investment
risks with respect to those securities that are different in some respects from
those incurred by a fund which invests only in securities of domestic issuers.
Such risks include possible adverse political and economic developments, seizure
or nationalization of foreign deposits or adoption of governmental restrictions
which might adversely affect the value of the securities of a
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foreign issuer to investors located outside the country of the issuer, whether
from currency blockage or otherwise. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company and traded on a U.S. Stock Exchange, that evidence
ownership of underlying foreign securities. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, such information may not correlate to the market value of the
unsponsored ADR.
Obligations of Foreign Governments, Banks and Corporations. The S&P 500 and LB
Bond Portfolios may invest in U.S. dollar-denominated short-term obligations
issued or guaranteed by one or more foreign governments or any of their
political subdivisions, agencies or instrumentalities that are determined by
their investment advisor to be of comparable quality to the other obligations in
which these Portfolios may invest. To the extent that such investments are
consistent with its investment objective, each of the S&P 500 and LB Bond
Portfolios may also invest in debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of these
Portfolios' assets invested in obligations of foreign governments and
supranational entities will vary depending on the relative yields of such
securities, the economic and financial markets of the countries in which the
investments are made and the interest rate climate of such countries.
Each of the S&P 500 and LB Bond Portfolios may also invest a portion of its
total assets in high quality, short-term (one year or less) debt obligations of
foreign branches of U.S. banks or U.S. branches of foreign banks that are
denominated in and pay interest in U.S. dollars.
U.S. Government Obligations. The Portfolios may invest in various types of U.S.
Government obligations. U.S. Government obligations include securities issued or
guaranteed as to principal and interest by the U.S. Government and supported by
the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ
mainly in the length of their maturity. Treasury bills, the most frequently
issued marketable government securities, have a maturity of up to one year and
are issued on a discount basis. U.S. Government obligations also include
securities issued or guaranteed by federal agencies or instrumentalities,
including government-sponsored enterprises. Some obligations of such agencies or
instrumentalities of the U.S. Government are supported by the full faith and
credit of the United States or U.S. Treasury guarantees. Other obligation of
such agencies or instrumentalities of the U.S. Government are supported by the
right of the issuer or guarantor to borrow from the U.S. Treasury. Others are
supported by the discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality or only by the credit of
the agency or instrumentality issuing the obligation.
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In the case of obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
Government would provide financial support to its agencies or instrumentalities
(including government-sponsored enterprises) where it is not obligated to do so.
In addition, U.S. government obligations are subject to fluctuations in market
value due to fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. government obligations, declines when
market interest rates increase and rises when market interest rates decrease.
Certain types of U.S. government obligations are subject to fluctuations in
yield or value due to their structure or contract terms.
Unrated, Downgraded and Below Investment Grade Investments. The Portfolios may
purchase instruments that are not rated if, in the opinion of their investment
advisor, such obligations are of investment quality comparable to other rated
investments that are permitted to be purchased by the Portfolios. The Money
Market Portfolio may purchase such instruments if they are purchased in
accordance with the Money Market Portfolio's procedures in accordance with Rule
2a-7 of the 1940 Act. After purchase by a Portfolio, a security may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Portfolio. Neither event will require a sale of such security by the
Portfolio provided that when a security ceases to be rated, the Board of
Trustees for that Portfolio determines that such security presents minimal
credit risks and provided further that, when a security is downgraded below the
eligible quality for investment or no longer presents minimal credit risks, the
Board of Trustees finds that the sale of such security would not be in that
Portfolio's best interests. In no event will such securities exceed 5% of any
Portfolio's net assets. To the extent the ratings given by Moody's or S&P may
change as a result of changes in such organizations or their rating systems, the
Portfolios will attempt to use comparable ratings as standards for investments
in accordance with the investment policies contained in this SAI. The ratings of
Moody's and S&P are more fully described in the Appendix to this SAI.
Because the Portfolios are not required to sell downgraded securities, the
Portfolios could hold up to 5% of each of their net assets in debt securities
rated below "Baa" by Moody's or below "BBB" by S&P or in unrated, low quality
(below investment grade) securities. Although they may offer higher yields than
do higher rated securities, low rated, and unrated, low quality debt securities
generally involve greater volatility of price and risk of principal and income,
including the possibility of default by, or bankruptcy of, the issuers of the
securities. In addition, the markets in which low rated and unrated, low quality
debt are traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may diminish
the Portfolio's ability to sell the securities at fair value either to meet
redemption requests or to respond to changes in the economy or in the financial
markets and could adversely affect and cause fluctuations in the daily net asset
value of the Portfolio's shares.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated or unrated, low
quality debt securities,
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especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated or unrated, low quality debt securities may be more complex
than for issuers of higher rated securities, and the ability of a Portfolio to
achieve its investment objective may, to the extent such Portfolio holds low
rated or unrated low quality debt securities, be more dependent upon such
creditworthiness analysis than would be the case if that Portfolio held
exclusively higher rated or higher quality securities.
Low rated or unrated low quality debt securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. The prices of such debt securities have been found
to be less sensitive to interest rate changes than higher rated or higher
quality investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in low rated
or unrated, low quality debt securities prices because the advent of a recession
could dramatically lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of the
debt securities defaults, a Portfolio may incur additional expenses to seek
recovery.
FUND POLICIES
Fundamental Investment Restrictions of the Funds
The following are the Funds' fundamental investment restrictions which, along
with the Funds' investment objectives, cannot be changed without shareholder
approval which would require a vote of a majority of the outstanding shares of
the applicable Fund, as set forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in a Fund's assets (i.e., due to cash inflows or redemptions) or in market value
of the investment or the Fund's assets will not constitute a violation of that
restriction.
13
<PAGE>
Unless indicated otherwise below, each of the Funds may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested, and
securities issued or guaranteed by the U.S. government, or its agencies or
instrumentalities may be purchased, without regard to any such limitation;
2. with respect to 75% of its total assets, invest in a security if, as a result
of such investment, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one issuer;
3. issue senior securities, except as permitted under the 1940 Act;
4. borrow money, except to the extent permitted under the 1940 Act, provided
that (i) the U.S.A. Bond Fund may borrow from banks up to 10% of the current
value of its net assets for temporary purposes only in order to meet
redemptions, and these borrowings may be secured by the pledge of up to 10% of
the current value of its net assets (but investments may not be purchased while
any such outstanding borrowing in excess of 5% of its net assets exists); and
(ii) the Premier S&P 500 Fund may borrow up to 20% of the current value of its
net assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 20% of the current value of its
net assets (but investments may not be purchased while any such outstanding
borrowing in excess of 5% of its net assets exists);
5. act as an underwriter of another issuer's securities, except to the extent
that the Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the disposition of portfolio securities;
6. purchase the securities of any issuer if, as a result, more than 25% of the
Fund's total assets (taken at market value at the time of such investment) would
be invested in the securities of issuers in any particular industry, provided,
however, that (i) this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (or
repurchase agreements thereto), or, for the U.S.A. Money Market Fund,
obligations of domestic banks, to the extent that the SEC, by rule or
interpretation, permits funds to reserve freedom to concentrate in such
obligations; and (ii) the Premier S&P 500 Fund and U.S.A. Bond Fund will
concentrate in obligations to the same degree that their respective Indexes
concentrate in those obligations during the same period;
7. purchase or sell real estate, although it may purchase securities secured by
real estate or interests therein, or securities issued by companies which invest
in real estate, or interests therein;
8. invest in commodities. This restriction shall not prohibit the Premier S&P
500 and U.S.A. Bond Funds, subject to restrictions described in the Prospectus
and elsewhere in this Statement of Additional Information, from purchasing,
selling or entering into futures
14
<PAGE>
contracts, options on futures contracts and other derivative instruments,
subject to compliance with any applicable provisions of the federal securities
or commodities laws;
9. lend any funds or other assets, except that the Funds may, consistent with
its investment objective and policies: (a) invest in certain short-term or
temporary debt obligations, even though the purchase of such obligations may be
deemed to be the making of loans, (b) enter into repurchase agreements, and (c)
lend its portfolio securities in an amount not to exceed 33 1/3% of the Fund's
total assets, provided such loans are made in accordance with applicable
guidelines established by the SEC and the Trustees of the Funds ((c) is not
permitted for the U.S.A. Money Market Fund).
Non-Fundamental Investment Restrictions of the Funds
The following are the Funds' non-fundamental operating restrictions, which may
be changed by the Funds' Board of Trustees without shareholder approval.
1. The Funds may invest in shares of other open-end management investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act. Under
the 1940 Act, a Fund's investment in such securities currently is limited,
subject to certain exceptions, to (i) 3% of the total voting stock of any one
investment company; (ii) 5% of such Fund's net assets with respect to any one
investment company; and (iii) 10% of such Fund's net assets in the aggregate.
Other investment companies in which the Funds invest can be expected to charge
fees for operating expenses, such as investment advisory and administration fees
that would be in additions to those charged by the Fund.
2. Each Fund may not invest more than 15% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others, (a)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties an that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven days.
3. Each Fund may lend securities from its portfolio to brokers, dealers,
financial institutions, in amounts not to exceed (in the aggregate) one-third of
a Fund's total assets. Any such loans of portfolio securities will be fully
collateralized based on values that are marked to market daily. The Funds will
not enter into any portfolio security lending arrangement having a duration of
longer than one year.
15
<PAGE>
PORTFOLIO POLICIES
The S&P 500 and LB Bond Portfolios: Fundamental Investment Restrictions
The Master Portfolios are subject to the following fundamental investment
restrictions which cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of these Portfolio's outstanding voting
securities. If a percentage restriction is adhered to at the time of investment,
a later change in percentage resulting from a change in values or assets will
not constitute a violation of such restriction.
Each of the S&P 500 and LB Bond Portfolios may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested, and
securities issued or guaranteed by the U.S. government, or its agencies or
instrumentalities may be purchased, without regard to any such limitation;
2. hold more than 10% of the outstanding voting securities of any single issuer.
This investment restriction applies only with respect to 75% of each Portfolio's
total assets;
3. invest in commodities, except that each Portfolio may purchase and sell
(i.e., write) options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes;
4. purchase, hold or deal in real estate, or oil, gas or other mineral leases or
exploration or development programs, but each Portfolio may purchase and sell
securities that are secured by real estate or issued by companies that invest or
deal in real estate;
5. borrow money, except to the extent permitted under the 1940 Act, provided
that the LB Bond Portfolio may borrow from banks up to 10% of the current value
of its net assets for temporary purposes only in order to meet redemptions, and
these borrowings may be secured by the pledge of up to 10% of the current value
of its net assets (but investments may not be purchased while any such
outstanding borrowing in excess of 5% of its net assets exists), and except that
the S&P 500 Portfolio may borrow up to 20% of the current value of its net
assets for temporary purposes only in order to meet redemptions, and these
borrowings may be secured by the pledge of up to 20% of the current value of its
net assets (but investments may not be purchased while any such outstanding
borrowing in excess of 5% of its net assets exists). For purposes of this
investment restriction, a Portfolio's entry into options, forward contracts,
futures contracts, including those relating to indexes, and options on futures
contracts or indexes shall not constitute borrowing to the extent certain
segregated accounts are established and maintained by such Portfolio;
6. make loans to others, except through the purchase of debt obligations and the
entry into repurchase agreements. However, each of the S&P 500 and LB Bond
Portfolios may lend its portfolio securities in an amount not to exceed
one-third of the value of its total assets. Any loans of portfolio securities
will be made according to guidelines established by the SEC and the Portfolios'
Board of Trustees;
16
<PAGE>
7. act as an underwriter of securities of other issuers, except to the extent
that the Portfolio may be deemed an underwriter under the Securities Act by
virtue of disposing of portfolio securities;
8. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries, except that there
shall be no limitation with respect to investments in (i) obligations of the
U.S. Government, its agencies or instrumentalities; (ii) in the case of the S&P
500 Master Portfolio, any industry in which the S&P 500 Index becomes
concentrated to the same degree during the same period; and (iii) in the case of
the LB Bond Portfolio, any industry in which the LB Bond Index becomes
concentrated to the same degree during the same period;
9. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in such Portfolio's
Fundamental Investment Restrictions Nos. 3 and 5 may be deemed to give rise to a
senior security; and
10. purchase securities on margin, but each Portfolio may make margin deposits
in connection with transactions in options, forward contracts, futures
contracts, including those related to indexes, and options on futures contracts
or indexes.
S&P 500 and LB Bond Portfolios: Non-Fundamental Investment Restrictions
The S&P 500 and LB Bond Portfolios are subject to the following non-fundamental
operating policies which may be changed by the Board of Trustees of these
Portfolios without the approval of the holders of such Portfolio's outstanding
securities.
1. The Portfolios may invest in shares of other open-end management investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act. Under
the 1940 Act, a Portfolio's investment in such securities currently is limited,
subject to certain exceptions, to (i) 3% of the total voting stock of any one
investment company; (ii) 5% of such Portfolio's net assets with respect to any
one investment company; and (iii) 10% of such Portfolio's net assets in the
aggregate. Other investment companies in which the Portfolios invest can be
expected to charge fees for operating expenses, such as investment advisory and
administration fees that would be in additions to those charged by the
Portfolio.
2. Each Portfolio may not invest more than 15% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others, (a)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties an that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven days.
3. Each Portfolio may lend securities from its portfolio to brokers, dealers,
financial institutions, in amounts not to exceed (in the aggregate) one-third of
a Portfolio's total assets. Any such loans of portfolio securities will be fully
collateralized based on values
17
<PAGE>
that are marked to market daily. The Portfolios
will not enter into any portfolio security lending arrangement having a duration
of longer than one year.
Money Market Portfolio: Fundamental Investment Restrictions
The Money Market Portfolio may not:
1. purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Money Market Portfolio's investments in that industry
would be 25% or more of the current value of the Money Market Portfolio's total
assets, provided that there is no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities; and (ii)
obligations of domestic banks, to the extent that the SEC, by rule or
interpretation, permits funds to reserve freedom to concentrate in such
obligations;
2. purchase or sell real estate or real estate limited partnerships (other than
securities secured by real estate or interests therein or securities issued by
companies that invest in real estate or interests therein);
3. purchase commodities or commodity contracts (including futures contracts),
except that the Money Market Portfolio may purchase securities of an issuer
which invests or deals in commodities or commodity contracts;
4. purchase interests, leases, or limited partnership interests in oil, gas, or
other mineral exploration or development programs;
5. purchase securities on margin (except for short-term credits necessary for
the clearance of transactions and except for margin payments in connection with
options, futures and options on futures) or make short sales of securities;
6. underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with the Money Market Portfolio's investment program may be deemed to
be an underwriting;
7. make investments for the purpose of exercising control or management;
8. borrow money or issue senior securities as defined in the 1940 Act, except
that the Money Market Portfolio may borrow from banks up to 10% of the current
value of its net assets for temporary purposes only in order to meet
redemptions, and these borrowings may be secured by the pledge of up to 10% of
the current value of its net assets (but investments may not be purchased while
any such outstanding borrowings in excess of 5% of its net assets exists);
18
<PAGE>
9. write, purchase or sell puts, calls, straddles, spreads, warrants, options or
any combination thereof, except that the Money Market Portfolio may purchase
securities with put rights in order to maintain liquidity;
10. purchase securities of any issuer (except securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities) if, as a result, with
respect to 75% of its total assets, more than 5% of the value of the Money
Market Portfolio's total assets would be invested in the securities of any one
issuer or, with respect to 100% of its total assets the Money Market Portfolio's
ownership would be more than 10% of the outstanding voting securities of such
issuer; or
11. make loans, except that the Money Market Portfolio may purchase or hold debt
instruments or lend its portfolio securities in accordance with its investment
policies, and may enter into repurchase agreements.
Money Market Portfolio: Non-Fundamental Investment Restrictions. The Money
Market Portfolio is subject to the following investment restrictions, all of
which are non-fundamental policies.
As a matter of non-fundamental policy:
1. The Money Market Portfolio may invest in shares of other open-end management
investment companies, subject to the limitations of Section 12(d)(1) of the 1940
Act. Under the 1940 Act, the Money Market Portfolio's investment in such
securities currently is limited, subject to certain exceptions, to (i) 3% of the
total voting stock of any one investment company, (ii) 5% of the Money Market
Portfolio's net assets with respect to any one investment company; and (iii) 10%
of the Money Market Portfolio's net assets in the aggregate. Other investment
companies in which the Money Market Portfolio invests can be expected to charge
fees for operating expenses, such as investment advisory and administration
fees, that would be in addition to those charged by the Money Market Portfolio.
2. The Money Market Portfolio may not invest more than 10% of its net assets in
illiquid securities. For this purpose, illiquid securities include, among
others, (i) securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale, (ii) fixed time
deposits that are subject to withdrawal penalties and that have maturities of
more than seven days, and (iii) repurchase agreements not terminable within
seven days.
3. The Money Market Portfolio may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the aggregate)
one-third of the Money Market Portfolio's total assets. Any such loans of
portfolio securities will be fully collateralized based on values that are
marked to market daily. The Money Market Portfolio will not enter into any
portfolio security lending arrangement having a duration of longer than one
year.
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<PAGE>
TRUSTEES AND OFFICERS
The Trust's Board of Trustees has the responsibility for the overall management
of the Funds, including general supervision and review of its investment
activities and the conformity with Delaware Law and the stated policies of the
Funds. The Board of Trustees elects the officers of the Trust who are
responsible for administering the Funds' day-to-day operations. Trustees and
officers of the Funds, together with information as to their principal business
occupations during the last five years, and other information are shown below.
Each "interested or affiliated person," as defined in the 1940 Act, is indicated
by an asterisk (*):
<PAGE>
<TABLE>
<S> <C> <C>
- ------------------------- ----------------------------------- ------------------------------------------
Name, Address, and Age Position(s) Held with the Fund Principal Occupation(s) During the Past
5 Years
- ------------------------- ----------------------------------- ------------------------------------------
Nicole E. Faucher Trustee President, Nicole E Faucher & Associates
(Internet company) (1998-present);
formerly, President, R.V. Kohn's &
Associates (investment consulting)
(1996-98); Managing Director, Western
Region, SEI Capital Resources
(investment consulting) (1993-96)
Kevin T. Hamilton Trustee Principal and Portfolio Manager, Messner
& Smith Investment Management Limited
(1998-present); formerly, Executive Vice
President, Montgomery Asset Management,
LLC (1991-98).
Elon R. Musk* Trustee, Director, President, and Treasurer,
Chairman of the Board of Trustees X.com Asset Management, Inc.
(1999-present); Chairman and Chief
Executive Officer, X.com (1999-present);
Executive Vice President and Principal
Founder, Zip2 Corp. (1995-99); Teaching
Assistant, Business Education, Wharton
School of Business, University of
Pennsylvania (1994-95)
20
<PAGE>
Gregory N. River Trustee Founder, Owner, and President, Paladin
Consulting Company (1996-present);
Consultant (investment services),
Self-Employed (1994-96).
John T. Story* Trustee; President Executive Vice President, X.com,
(1999-present); President, John T. Story
& Associates (mutual fund consulting)
(1998-99); Executive Vice President,
Montgomery Asset Management (1994-1998).
</TABLE>
*Each of Mr. Musk and Mr. Story is an "interested person" of the Trust (as that
term is defined in the 1940 Act) because of his affiliations with the Fund.
The Trust pays each non-affiliated Trustee a quarterly fee of $500 per Board
meeting for the Funds. In addition, the Trust reimburses each of the
non-affiliated Trustee for travel and other expenses incurred in connection with
attendance at such meetings. Other officers and Trustees of the Trust receive no
compensation or expense reimbursement. The following table provides an estimate
of each Trustee's compensation for the current fiscal year:
21
<PAGE>
Estimated Compensation Table
- ------------------- --------------------------- -----------------------------
Total Compensation From
Name of Person, Aggregate Compensation Funds and Trust Expected to
Position from the Funds be Paid to Trustees (1)
- ------------------- --------------------------- -----------------------------
Nicole E. Faucher $2,000 $2,000
Kevin T. Hamilton $2,000 $2,000
Gregory N. River $2,000 $2,000
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Funds' expenses. ------------
(1) This amount represents the estimated aggregate amount of compensation
paid to each non-affiliated Trustee for service on the Board of
Trustees for the fiscal year ending December 31, 1999.
Control Persons and Principal Holders of Securities
A shareholder that owns 25% or more of any Funds' voting securities is in
control of that Fund on matters submitted to a vote of shareholders. To satisfy
regulatory requirements, as of September 30, 1999, X.com Asset Management, Inc.,
the Funds' investment adviser, owned 100% of the Funds' outstanding shares.
There are no other shareholders holding 25% or more.
INVESTMENT MANAGEMENT
Investment Advisers. Under an investment advisory agreement with the Trust,
X.com Asset Management, Inc. ("Investment Adviser") provides investment advisory
services to the Funds. The Investment Adviser is a wholly owned subsidiary of
X.com, a Delaware corporation.
Subject to general supervision of the Trust's Board of Trustees and in
accordance with the investment objective, policies and restrictions of each of
the Funds, the Investment Adviser provides the Funds with ongoing investment
guidance, policy direction and monitoring of each of the Portfolios. The
Investment Adviser may in the future manage cash and money market instruments
for cash flow purposes. The Investment Adviser also provides or arranges for
administration, transfer agency, custody and all other services necessary for
the Funds to operate. The Investment Adviser has not previously had
responsibility for managing a mutual fund. For its services, the Premier S&P 500
Fund pays the Investment Adviser an investment advisory fee at an annual rate
equal to 0.23% of its average daily net assets; the U.S.A. Bond Fund pays the
22
<PAGE>
Investment Adviser an investment advisory fee at an annual rate equal to 0.32%
of its average daily net assets and the U.S.A. Money Market Fund pays the
Investment Adviser an investment advisory fee at an annual rate equal to 0.50%
of its average daily net assets.
The Investment Adviser has entered into an expense limitation and reimbursement
agreement with the Trust, under which the Investment Adviser will waive all
investment advisory fees payable to it by the Premier S&P 500 Fund, 0.21% of the
investment advisory fees payable to it by the U.S.A. Bond Fund, and 0.10% of the
investment advisory fees payable to it by the U.S.A. Money Market Fund.
The Portfolio's Investment Adviser. The Portfolio's investment advisor is
Barclays Global Fund Advisors ("BGFA"). BGFA is a direct subsidiary of Barclays
Global Investors, N.A. (which, in turn, is an indirect subsidiary of Barclays
Bank PLC ("Barclays")) and is located at 45 Fremont Street, San Francisco,
California 94105. BFGA has provided assets management, administration and
advisory services for over 25 years. As of March 31, 1999, BGFA and its
affiliates provided investment advisory services for over $651 billion of
assets. Barclays Bank PLC has been involved in banking in the United Kingdom for
over 300 years. Pursuant to an Investment Advisory Contract dated January 1,
1996 (the "Advisory Contract") with the Portfolios, BGFA provides investment
guidance and policy direction in connection with the management of the
Portfolio's assets. Pursuant to the Advisory Contract, BGFA furnishes to the
Portfolio's Board of Trustees periodic reports on the investment strategy and
performance of the Portfolios. BGFA receives fees from the S&P 500 Portfolio,
the LB Bond Portfolio and the Money Market Portfolio at an annual rate equal to
0.05%, 0.08% and 0.10%, respectively, of the Portfolio's average daily net
assets. This advisory fee is an expense of each Portfolio borne proportionately
by its interestholders, including each of the respective Funds.
The Investment Adviser has entered into an expense limitation and reimbursement
agreement with the Trust, under which the Investment Adviser will reimburse the
Premier S&P 500 Fund for all fees incurred at the Master Portfolio level.
The Advisory Contract for the Portfolios provides that if, in any fiscal year,
the total expenses of the S&P 500 or LB Bond Portfolio (excluding taxes,
interest, brokerage commissions and extraordinary expenses but including the
fees provided for in the Advisory Contract) exceed the most restrictive expense
limitation applicable to the applicable Portfolio imposed by the securities laws
or regulations of the states having jurisdiction over that Portfolio, BGFA shall
waive its fees under the Advisory Contract for the fiscal year to the extent of
the excess or reimburse the excess of such Portfolio, but only to the extent of
its fees.
BGFA has agreed to provide to each Portfolio, among other things, money market
security and fixed-income research, analysis and statistical and economic data
and information concerning interest rate and security market trends, portfolio
composition, credit conditions and average maturities of each Portfolio's
investment portfolio.
23
<PAGE>
The Advisory Contract will continue in effect for more than two years for each
Portfolio provided the continuance is approved annually (i) by the holders of a
majority of the applicable Portfolio's outstanding voting securities or by the
applicable Portfolio's Board of Trustees and (ii) by a majority of the Trustees
of the applicable Portfolio who are not parties to the Advisory Contract or
affiliated of any such party. The Advisory Contract may be terminated on 60
day's written notice by either party and will terminate automatically if
assigned.
Asset allocation and modeling strategies are employed by BGFA for other
investment companies and accounts advised or sub-advised by BGFA. If these
strategies indicate particular securities should be purchased or sold at the
same time by a Portfolio and one or more of these investment companies or
accounts, available investments or opportunities for sales will be allocated
equitably to each by BGFA. In some cases, these procedures may adversely affect
the size of the position obtained for or disposed of by a Portfolio or the price
paid or received by a Portfolio.
SERVICE PROVIDERS
Administrator of the Fund. Investors Bank & Trust Company ("IBT"), 200 Clarendon
Street, Boston, MA 02111, serves as the Funds' administrator. As the Funds'
administrator, IBT provides administrative services directly or through
sub-contracting, including: (i) general supervision of the operation of the
Funds, including coordination of the services performed by the investment
adviser, transfer and dividend disbursing agent, custodian, shareholder
servicing agent, independent auditors and legal counsel; (ii) general
supervision of regulatory compliance matters, including the compilation of
information for documents such as reports to, and filings with, the SEC and
state securities commissions; and (iii) periodic reviews of management reports
and financial reporting. IBT also furnishes office space and certain facilities
required for conducting the business of the Fund. The Investment Adviser pays
IBT for all administrative services provided to the Funds.
Administrator of the Portfolios. Stephens, Inc. ("Stephens"), and Barclays
Global Investors, N.A. ("BGI") serve as co-administrators on behalf of the
Portfolios. Under the Co-Administration Agreement between Stephens, BGI and the
Portfolios, Stephens and BGI provide as administrative services, among other
things: (i) general supervision of the operation of the Portfolios, including
coordination of the services performed by the investment adviser, transfer and
dividend disbursing agent, custodian, shareholder servicing agent(s),
independent auditors and legal counsel; (ii) general supervision of regulatory
compliance matters, including the compilation of information for documents such
as reports to, and filings with, the SEC and state securities commissions; and
preparation of proxy statements and shareholder reports for the Portfolios; and
(iii) general supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Portfolio's officers and
Board of Trustees. Stephens also furnishes office space and certain facilities
required for conducting the business of the Portfolios together with those
ordinary clerical and bookkeeping services that are not furnished by BGFA.
Stephens also pays the compensation of the Portfolio's Trustees,
24
<PAGE>
officers and employees who are affiliated with Stephens. Furthermore, except as
provided in the advisory contract, Stephens and BGI bear substantially all costs
of the Portfolios and the Portfolio's operations. However, Stephens and BGI are
not required to bear any cost or expense which a majority of the non-affiliated
Trustees of the Portfolios deem to be an extraordinary expense.
Custodian and Fund Accounting Services Agent. IBT also serves as custodian of
the assets of the Funds and the Portfolios. As a result, IBT has custody of all
securities and cash of the Funds and the Portfolios, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments, and performs other duties, all as directed by
the officers of the Funds and the Portfolios. The custodian has no
responsibility for any of the investment policies or decisions of the Funds and
the Portfolios. IBT also acts as the Funds' Accounting Services Agent. The
Investment Adviser pays IBT for all custodial services provided to the Funds.
Transfer Agent and Dividend Disbursing Agent. X.com Asset Management, Inc., 394
University Avenue, Palo Alto, California 94301, acts as transfer agent and
dividend disbursing agent for the Funds.
Fund Shareholder Servicing Agent. Under a Shareholder Servicing Agreement, the
Bank acts as shareholder servicing agent for the Fund. As shareholder servicing
agent, the Bank provides personal services to the Funds' shareholders and
maintains the Funds' shareholder accounts. Such services include, (i) answering
shareholder inquiries regarding account status and history, the manner in which
purchases and redemptions of the Funds' shares may be effected, and certain
other matters pertaining to the Funds; (ii) assisting shareholders in
designating and changing dividend options, account designations and addresses;
(iii) providing necessary personnel and facilities to coordinate the
establishment and maintenance of shareholder accounts and records with the
Funds' transfer agent; (iv) transmitting shareholder's purchase and redemption
orders to the Funds' transfer agent; (v) arranging for the wiring or other
transfer of funds to and from shareholder accounts in connection with
shareholder orders to purchase or redeem shares of the Fund; (vi) verifying
purchase and redemption orders, transfers among and changes in
shareholder-designated accounts; (vii) informing the distributor of the Fund of
the gross amount of purchase and redemption orders for the Funds' shares; (viii)
provide certain printing and mailing services, such as printing and mailing of
shareholder account statements, checks, and tax forms; and (ix) providing such
other related services as the Fund or a shareholder may reasonably request, to
the extent permitted by applicable law.
Independent Auditors. KPMG LLP, 99 High Street, Boston, Massachusetts, 02110,
acts as independent auditors for the Fund.
Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, DC
20006-2401, acts as legal counsel for the Fund.
25
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION
The Portfolios have no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policies
established by the Portfolios' Board of Trustees, BGFA as advisor to the
Portfolios, is responsible for the Portfolios' investment portfolio decisions
and the placing of portfolio transactions. In placing orders, it is the policy
of the Portfolios to obtain the best results taking into account the
broker/dealer's general execution and operational facilities, the type of
transaction involved and other factors such as the broker/dealer's risk in
positioning the securities involved. While BGFA generally seeks reasonably
competitive spreads or commissions, the Portfolios will not necessarily be
paying the lowest spread or commission available.
Purchase and sale orders of the securities held by the Portfolios may be
combined with those of other accounts that BGFA manages, and for which it has
brokerage placement authority, in the interest of seeking the most favorable
overall net results. When BGFA determines that a particular security should be
bought or sold for a Portfolio and other accounts managed by BGFA, BGFA
undertakes to allocate those transactions among the participants equitably.
Under the 1940 Act, persons affiliated with the Portfolios such as Stephens,
BGFA and their affiliates are prohibited from dealing with the Portfolios as a
principal in the purchase and sale of securities unless an exemptive order
allowing such transactions is obtained from the SEC or an exemption is otherwise
available.
Except in the case of equity securities purchased by the S&P 500 Portfolio,
purchases and sales of securities usually will be principal transactions.
Portfolio securities normally will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. The Portfolios also
will purchase portfolio securities in underwritten offerings and may purchase
securities directly from the issuer. Generally, money market securities,
adjustable rate mortgage securities ("ARMS"), municipal obligations, and
collateralized mortgage obligations ("CMOs") are traded on a net basis and do
not involve brokerage commissions. The cost of executing the Portfolio's
investment portfolio securities transactions will consist primarily of dealer
spreads and underwriting commissions.
Purchases and sales of equity securities on a securities exchange are effected
through brokers who charge a negotiated commission for their services. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Stephens or BGI. In the over-the-counter market,
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
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In placing orders for portfolio securities of the Portfolios, BGFA is required
to give primary consideration to obtaining the most favorable price and
efficient execution. This means that BGFA seeks to execute each transaction at a
price and commission, if any, that provide the most favorable total cost or
proceeds reasonably attainable in the circumstances. While BGFA generally seeks
reasonably competitive spreads or commissions, the Portfolios will not
necessarily be paying the lowest spread or commission available. In executing
portfolio transactions and selecting brokers or dealers, BGFA seeks to obtain
the best overall terms available for the Portfolios. In assessing the best
overall terms available for any transaction, BGFA considers factors deemed
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. Rates are established pursuant to
negotiations with the broker based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Portfolio's Board of Trustees.
Certain of the brokers or dealers with whom the Portfolios may transact business
offer commission rebates to the Portfolios. BGFA considers such rebates in
assessing the best overall terms available for any transaction. The overall
reasonableness of brokerage commissions paid is evaluated by BGFA based upon its
knowledge of available information as to the general level of commission paid by
other institutional investors for comparable services.
ORGANIZATION, DIVIDEND AND VOTING RIGHTS
The Funds are diversified series of X.com Funds (the "Trust"), an open-end
investment company, organized as a Delaware business trust on June 7, 1999. The
Trust may issue additional series and classes.
All shareholders may vote on each matter presented to shareholders. Fractional
shares have the same rights proportionately as do full shares. Shares of the
Trust have no preemptive, conversion, or subscription rights. If the Trust
issues additional series, each series of shares will be held separately by the
custodian, and in effect each series will be a separate fund.
All shares of the Trust have equal voting rights. Approval by the shareholders
of a Fund is effective as to that Fund whether or not sufficient votes are
received from the shareholders of the other investment portfolios to approve the
proposal as to those investment portfolios.
Generally, the Trust will not hold an annual meeting of shareholders unless
required by the 1940 Act. The Trust will hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the 1940 Act.
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Each share of the Funds represents an equal proportional interest in that Fund
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to that Fund as are declared in the discretion of the
Trustees. In the event of the liquidation or dissolution of the Trust,
shareholders of a Fund are entitled to receive the assets attributable to that
Fund that are available for distribution, and a distribution of any general
assets not attributable to a particular investment portfolio that are available
for distribution in such manner and on such basis as the Trustees in their sole
discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid and non-assessable by the Trust.
Under Delaware law, the shareholders of the Funds are not generally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in other
states. As a result, to the extent that a Delaware business trust or a
shareholder is subject to the jurisdiction of courts of such other states, the
courts may not apply Delaware law and may thereby subject the Delaware business
trust shareholders to liability. To guard against this risk, the Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of a Fund. Notice of such disclaimer will generally be given in each
agreement, obligation or instrument entered into or executed by a series or the
Trustees. The Declaration of Trust also provides for indemnification by the
relevant series for all losses suffered by a shareholder as a result of an
obligation of the series. In view of the above, the risk of personal liability
of shareholders of a Delaware business trust is remote.
SHAREHOLDER INFORMATION
Shares are sold through the Bank and are distributed by the Funds.
Pricing of Fund Shares. The net asset value of the Premier S&P 500 and U.S.A.
Bond Funds will be determined as of the close of trading on each day the New
York Stock Exchange ("NYSE") is open for trading. The NYSE is open for trading
Monday through Friday except on national holidays observed by the NYSE. The
U.S.A. Money Market Fund uses the amortized cost method to determine the value
of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The
amortized cost method involves valuing a security at its cost and amortizing any
discount or premium over the period until maturity, regardless of the impact of
fluctuating interest rates on the market value of the security. The yield to a
shareholder may differ somewhat from that which could be obtained from a similar
fund that uses a method of valuation based upon market prices.
Rule 2a-7 provides that in order to value its portfolio using the amortized cost
method, the U.S.A. Money Market Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase securities having remaining
maturities (as defined in Rule 2a-7) of thirteen months or less and invest only
in those high-quality securities that are determined by the Board of Trustees to
present minimal credit risks. The maturity of an
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instrument is generally deemed
to be the period remaining until the date when the principal amount thereof is
due or the date on which the instrument is to be redeemed. However, Rule 2a-7
provides that the maturity of an instrument may be deemed shorter in the case of
certain instruments, including certain variable- and floating-rate instruments
subject to demand features. Pursuant to the Rule, the Board of Trustees is
required to establish procedures designed to stabilize, to the extent reasonably
possible, the U.S.A. Money Market Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of the
U.S.A. Money Market Fund's portfolio holdings by the Board of Trustees, at such
intervals as it may deem appropriate, to determine whether the U.S.A. Money
Market Fund's net asset value calculated by using available market quotations
deviates from the $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Board of Trustees. If such deviation exceeds
1/2 of 1%, the Board of Trustees will promptly consider what action, if any,
will be initiated. In the event the Board of Trustees determines that a
deviation exists that may result in material dilution or other unfair results to
shareholders, the Board of Trustees will take such corrective action as it
regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends or establishing a net asset
value per share by using available market quotations.
Telephone and Internet Redemption Privileges. The Trust employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Trust and the Funds may not be liable for losses due
to unauthorized or fraudulent instructions. Such procedures include but are not
limited to requiring a form of personal identification prior to acting on
instructions received by telephone or the Internet, providing written
confirmations of such transactions to the address of record, tape recording
telephone instructions and backing up Internet transactions.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Taxation of the Fund. The Fund intends to be taxed as a regulated investment
company under Subchapter M of the Code. Accordingly, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other
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disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of the Fund's total assets is represented
by cash and cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and the securities of other regulated investment companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
Distributions. Distributions of investment company taxable income (including net
short-term capital gains) are taxable to a U.S. shareholder as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations, may, subject to limitation, be eligible for
the dividends received deduction. However, the alternative minimum tax
applicable to corporations may reduce the value of the dividends received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends, whether paid in cash or reinvested in Fund shares, will
generally be taxable to shareholders as long-term capital gain, regardless of
how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such distributions will be taxable to shareholders in the
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calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Dispositions. Upon a redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and will be long-term
capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for not more than one
year. Any loss realized on a redemption, sale or exchange will be disallowed to
the extent the shares disposed of are replaced (including through reinvestment
of dividends) within a period of 61 days, beginning 30 days before and ending 30
days after the shares are disposed of. In such a case the basis of the shares
acquired will be adjusted to reflect the disallowed loss. If a shareholder holds
Fund shares for six months or less and during that period receives a
distribution taxable to the shareholder as long-term capital gain, any loss
realized on the sale of such shares during such six-month period would be a
long-term loss to the extent of such distribution.
Backup Withholding. The Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding.
Any amounts withheld may be credited against the shareholder's federal income
tax liability.
Other Taxation. Distributions may be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation.
Market Discount. If the Fund purchases a debt security at a price lower than the
stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to
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the lesser of (i) the amount of market discount accruing during such period
(plus any accrued market discount for prior periods not previously taken into
account) or (ii) the amount of the principal payment with respect to such
period. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest. Gain realized on the disposition of a market discount obligation must
be recognized as ordinary interest income (not capital gain) to the extent of
the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts and
certain options (namely, nonequity options and dealer equity options) in which
the Fund may invest may be "section 1256 contracts." Gains (or losses) on these
contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the Fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the Fund, and losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that the Fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition of
gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the
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straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
MASTER PORTFOLIO ORGANIZATION
The Portfolios are series of Master Investment Portfolio ("MIP"), an open-end,
series management investment company organized as Delaware business trust. MIP
was organized on October 21, 1993. In accordance with Delaware law and in
connection with the tax treatment sought by MIP, the Declaration of Trust
provides that its investors are personally responsible for Trust liabilities and
obligations, but only to the extent the Trust property is insufficient to
satisfy such liabilities and obligations. The Declaration of Trust also provides
that MIP must maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its investors,
Trustees, officers, employees and agents covering possible tort and other
liabilities, and that investors will be indemnified to the extent they are held
liable for a disproportionate share of MIP's obligations. Thus, the risk of an
investor incurring financial loss on account of investor liability is limited to
circumstances in which both inadequate insurance existed and MIP itself was
unable to meet its obligations.
The Declaration of Trust further provides that obligations of MIP are not
binding upon its Trustees individually but only upon the property of MIP and
that the Trustees will not be liable for any action or failure to act, but
nothing in the Declarations of Trust protects a Trustee against any liability to
which the Trustee would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of the Trustee's office.
The interests in the Portfolios have substantially identical voting and other
rights as those rights enumerated above for shares of the Fund. MIP is generally
not required to hold annual meetings, but is required by Section 16(c) of the
1940 Act to hold a special meeting and assist investor communications under
certain circumstances. Whenever the
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one of the Funds is requested to vote on a matter with respect to the Portfolio
in which it invests, that Fund will hold a meeting of Fund shareholders and will
cast its votes as instructed by such shareholders.
In a situation where a Fund does not receive instruction from certain of its
shareholders on how to vote the corresponding shares of the applicable
Portfolio, such Fund will vote such shares in the same proportion as the shares
for which the Fund does receive voting instructions.
Master/Feeder Structure. Each Fund seeks to achieve its investment objective by
investing all of its assets into the corresponding Master Portfolio of MIP. The
Funds and other entities investing in a Master Portfolio are each liable for all
obligations of such Master Portfolio. However, the risk of a Fund incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and MIP itself is unable to meet its
obligations. Accordingly, the Trust's Board of Trustees believes that neither a
Fund nor its shareholders will be adversely affected by investing Fund assets in
a Master Portfolio. However, if a mutual fund or other investor withdraws its
investment from such Master Portfolio, the economic efficiencies (e.g.,
spreading fixed expenses among a larger asset base) that the Trust's Board of
Trustees believes may be available through investment in the Master Portfolio
may not be fully achieved. In addition, given the relative novelty of the
master/feeder structure, accounting or operational difficulties, although
unlikely, could arise.
A Fund may withdraw its investment in a Master Portfolio only if the Trust's
Board of Trustees determines that such action is in the best interests of such
Fund and its shareholders. Upon any such withdrawal, the Trust's Board of
Trustees would consider alternative investments, including investing all of the
Fund's assets in another investment company with the same investment objective
as the Fund or hiring an investment adviser to manage the Fund's assets in
accordance with the investment policies described below with respect to the
Master Portfolio.
Certain policies of the Master Portfolio which are non-fundamental may be
changed by vote of a majority of MIP's Trustees without interestholder approval.
If the Master Portfolio's investment objective or fundamental or non-fundamental
policies are changed, the Fund may elect to change its objective or policies to
correspond to those of the Master Portfolio. A Fund also may elect to redeem its
interests in the corresponding Master Portfolio and either seek a new investment
company with a matching objective in which to invest or retain its own
investment adviser to manage the Fund's portfolio in accordance with its
objective. In the latter case, a Fund's inability to find a substitute
investment company in which to invest or equivalent management services could
adversely affect shareholders' investments in the Fund. The Funds will provide
shareholders with 30 days' written notice prior to the implementation of any
change in the investment objective of the Fund or the Master Portfolio, to the
extent possible.
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PERFORMANCE INFORMATION
The Premier S&P 500 and U.S.A. Bond Funds may advertise a variety of types of
performance information as more fully described below. All of the Funds'
performance is historical and past performance does not guarantee the future
performance of the Funds. From time to time, the Investment Adviser may agree to
waive or reduce its management fee and/or to reimburse certain operating
expenses of the Funds. Waivers of management fees and reimbursement of other
expenses will have the effect of increasing the Funds' performance.
Average Annual Total Return. The Premier S&P 500 and U.S.A. Bond Funds' average
annual total return quotation will be computed in accordance with a standardized
method prescribed by rules of the SEC. The average annual total return for these
Funds for a specific period is calculated as follows:
P(1+T)(To the power of n) = ERV
Where:
P = a hypothetical initial payment of $10,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $10,000 payment
made at the beginning of the applicable period at the end of the
period.
The calculation assumes that all income and capital gains dividends paid by
these Funds have been reinvested at net asset value on the reinvestment dates
during the period and all recurring fees charges to all shareholder accounts are
included.
Total Return. Calculation of each of the Premier S&P 500 and U.S.A. Bond Funds'
total return is not subject to a standardized formula. Total return performance
for a specific period will be calculated by first taking an investment (assumed
below to be $10,000) ("initial investment") in these Funds' shares on the first
day of the period and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by these Funds have
been reinvested at net asset value of the Funds on the reinvestment dates during
the period. Total return may also be shown as the increased dollar value of the
hypothetical investment over the period.
Cumulative Total Return. Cumulative total return represents the simple change in
value of an investment over a stated period and may be quoted as a percentage or
as a dollar amount. Total returns and cumulative total returns may be broken
down into their components of income and capital (including capital gains and
changes in share price) in order to illustrate the relationship between these
factors and their contributions to total return.
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Distribution Rate. The distribution rate for each of the Premier S&P 500 and
U.S.A. Bond Funds will be computed, according to a non-standardized formula by
dividing the total amount of actual distributions per share paid by the
applicable Fund over a twelve month period by that Fund's net asset value on the
last day of the period. The distribution rate differs from these Funds' yield
because the distribution rate includes distributions to shareholders from
sources other than dividends and interest, such as short-term capital gains.
Therefore, these Funds' distribution rate may be substantially different than
its yield. Both the Funds' yield and distribution rates will fluctuate.
Yield. The yield for the Funds, including the U.S.A. Money Market Fund,
fluctuates from time to time, unlike bank deposits or other investments that pay
a fixed yield for a stated period of time, and does not provide a basis for
determining future yields since it is based on historical data. Yield is
generally a function of portfolio quality, composition, maturity and market
conditions as well as the expenses allocated to the particular Fund. The yield
will be calculated based on a 30-day (or one-month) period, computed by dividing
the net investment income per share earned during the period by the maximum
offering price per share on the last day of the period and annualizing the
result, according to the following formula:
YIELD = 2[(a-b+1)(To the power of 6)-1], cd
where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends;
d = the maximum offering price per share on the last day of the
period.
The net investment income of the Index Funds include actual interest income,
plus or minus amortized purchase discount (which may include original issue
discount) or premium, less accrued expenses. Realized and unrealized gains and
losses on portfolio securities are not included in the Index Funds' net
investment income.
Current yield for the U.S.A. Money Market Fund is calculated based on the net
changes, exclusive of capital changes, over a seven day and/or thirty day
period, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
Effective yield for the U.S.A. Money Market Fund is calculated by determining
the net change exclusive of capital changes in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical
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charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding one, raising the same to a power equal to 365 divided by seven, and
subtracting one from the result.
Performance Comparisons:
Certificates of Deposit. Investors may want to compare a Fund's performance to
that of certificates of deposit offered by banks and other depositary
institutions. Certificates of deposit may offer fixed or variable interest rates
and principal is guaranteed and may be insured. Withdrawal of the deposits prior
to maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by the
issuing institution.
Money Market Funds. Investors may also want to compare performance of a Fund to
that of money market funds. Money market fund yields will fluctuate and shares
are not insured, but share values usually remain stable.
Lipper Analytical Services, Inc. ("Lipper") and Other Independent Ranking
Organizations. From time to time, in marketing and other fund literature, a
Fund's performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value, with
all income and capital gains dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. A Fund may be
compared to Lipper's appropriate fund category, that is, by fund objective and
portfolio holdings. A Fund's performance may also be compared to the average
performance of its Lipper category.
Morningstar, Inc. A Fund's performance may also be compared to the performance
of other mutual funds by Morningstar, Inc., which rates funds on the basis of
historical risk and total return. Morningstar's ratings range from five stars
(highest) to one star (lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a weighted average for 3, 5,
and 10 year periods. Ratings are not absolute and do not represent future
results.
Independent Sources. Evaluations of fund performance made by independent sources
may also be used in advertisements concerning the Funds, including reprints of,
or selections from, editorials or articles about the Funds, especially those
with similar objectives. Sources for fund performance and articles about the
Funds may include publications such as Money, Forbes, Kiplinger's, Smart Money,
Financial World, Business Week, U.S. News and World Report, The Wall Street
Journal, Barron's, and a variety of investment newsletters.
37
<PAGE>
Indices. The Funds may compare their performance to a wide variety of indices.
There are differences and similarities between the investments that a Fund may
purchase and the investments measured by the indices.
Historical Asset Class Returns. From time to time, marketing materials may
portray the historical returns of various asset classes. Such presentations will
typically compare the average annual rates of return of inflation, U.S. Treasury
bills, bonds, common stocks, and small stocks. There are important differences
between each of these investments that should be considered in viewing any such
comparison. The market value of stocks will fluctuate with market conditions,
and small-stock prices generally will fluctuate more than large-stock prices.
Stocks are generally more volatile than bonds. In return for this volatility,
stocks have generally performed better than bonds or cash over time. Bond prices
generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
The historical S&P 500 data presented from time to time is not intended to
suggest that an investor would have achieved comparable results by investing in
any one equity security or in managed portfolios of equity securities, such as
the Fund, during the periods shown.
Portfolio Characteristics. In order to present a more complete picture of a
Fund's portfolio, marketing materials may include various actual or estimated
portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
Measures of Volatility and Relative Performance. Occasionally statistics may be
used to specify fund volatility or risk. The general premise is that greater
volatility connotes greater risk undertaken in achieving performance. Measures
of volatility or risk are generally used to compare a fund's net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market as represented by the
Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility
greater than the market, and a beta of less than 1.00 indicates volatility less
than the market. Another measure of volatility or risk is standard deviation.
Standard deviation is a statistical tool that measures the degree to which a
fund's performance has varied from its average performance during a particular
time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of S(xi - xm)2
n-1
Where: S = "the sum of",
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xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss a Fund's relative performance. One such
measure is alpha. Alpha measures the actual return of a fund compared to the
expected return of a fund given its risk (as measured by beta). The expected
return is based on how the market as a whole performed, and how the particular
fund has historically performed against the market. Specifically, alpha is the
actual return less the expected return. The expected return is computed by
multiplying the advance or decline in a market representation by the fund's
beta. A positive alpha quantifies the value that the fund manager has added, and
a negative alpha quantifies the value that the fund manager has lost. Other
measures of volatility and relative performance may be used as appropriate.
However, all such measures will fluctuate and do not represent future results.
Discussions of economic, social, and political conditions and their impact on
the Funds may be used in advertisements and sales materials. Such factors that
may impact the Funds include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior, industry
trends, technological advances, macroeconomic trends, and the supply and demand
of various financial instruments. In addition, marketing materials may cite the
portfolio management's views or interpretations of such factors.
Master Fund Performance. The Funds intend to disclose historical performance of
the Portfolios, including the average annual and cumulative returns restated to
reflect the expense ratio of the Funds. This information will be included by
amendment. Although the investments of the Portfolios will be reflected in the
Funds, the Funds are distinct mutual funds and have different fees, expenses and
returns than the Portfolios. Historical performance of substantially similar
mutual funds is not indicative of future performance of the Funds. Portfolio
performance will be supplied by the Portfolio.
FINANCIAL STATEMENTS
The statements of assets and liabilities of the Funds as of September 10, 1999,
and related notes to the statements of assets and liabilities, and the
independent auditors' report, are included herein.
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X.com Funds
Statements of Assets and Liabilities
September 10, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Free +1 U.S. Bond Money Market
S&P 500 Fund Fund
Fund
ASSETS:
Cash......................................................... $ 35,000 35,000 30,000
-------- ---------- -----------
Total Assets................................................. 35,000 35,000 30,000
LIABILITIES:
Total Liabilities...................................................... 0 0 0
-------- --------- -----------
NET ASSETS...........................................................$ 35,000 35,000 30,000
========= ========== ===========
Net assets consist of.
Paid-in Capital......................................................$ 35,000 35,000 30,000
--------- ---------- -------------
NET ASSETS:..........................................................$ 35,000 35,000 30,000
========= ========== =============
Shares issued and outstanding (unlimited shares authorized): 3,500 3,500 30,000
========= ========== ============
NET ASSET VALUE: $ 10.00 10.00 1.00
========= ========== ============
</TABLE>
See Notes to Statement of Assets and Liabilities
40
<PAGE>
X.com Funds
Notes to Statements of Assets and Liabilities
September 10, 1999
I. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
X.com Funds (the "Trust"), is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Trust was established as a Delaware business trust organized pursuant to a
Declaration of Trust on June 3, 1999. The Trust currently offers three Funds;
the Free +1 S&P 500 Fund, the U.S. Bond Fund, and the Money Market Fund (each, a
"Fund", collectively the "Funds"). Each Fund is a diversified series of the
Trust. The investment objectives of each Fund are as follows;
Free +1 S&P 500 Fund - seeks to approximate as closely as practicable, before
fees and expenses, the capitalization-weighted total rate of return of the
Standard and Poor's 500 Composite Stock Price Index.
US. Bond Fund - seeks to approximate as closely as practicable, before fees and
expenses, the total rate of return of the of the U.S. market for issued and
outstanding U.S. government and high grade corporate bonds as measured by the
Lehman Brothers Corporate Bond Index.
Money Market Fund - seeks to provide a high level of income while preserving
capital and liquidity and maintaining, a stable net asset value by investing in
high quality, short-term securities.
Each fund is a "'feeder" fund in a "master-feeder" structure. Instead of
investing directly in individual securities, a feeder fund, which is offered to
the public, invests in a Master Portfolio that has substantially the same
investment objectives as the feeder fund. It is the Master Portfolio that
actually invests in the individual securities. The Free +1 S&P 500 Fund, the
U.S. Bond Fund, and the Money Market Fund pursue their investment objectives by
investing all of their assets in the S&P 500 Index Master Portfolio, the Bond
Index Master Portfolio, and the Money Market Master Portfolio (each a "Master
Portfolio", collectively the "Master Portfolios"), respectively. Each Master
Portfolio is a separate series of Master Investment Portfolio ("MIP"). Barclays
Global Fund Advisors (BGFA), an indirect subsidiary of Barclays Bank PLC, is the
investment advisor for the Master Portfolios.
As of September 10, 1999, the Trust had no operations other than organizational
matters, including the issuance of seed money shares to X.com Asset Management,
Inc.
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2. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES
X.com Asset Management, Inc. ("XAM"), a wholly owned subsidiary of Xcom, Inc.
serves as the Funds' investment adviser. For their services, XAM is paid a fee
at an annual rate of 0.02% of each Fund's average daily net assets.
Pursuant to an Investment Advisory Contract with each Master Portfolio, BGFA
provides investment guidance and policy direction in connection with the
management of each Master Portfolio's assets. For its services, BGFA is entitled
to receive 0.05%, 0.08% and 0. 10%, of the average daily net assets of the S&P
500 Index Master Portfolio, the Bond Index Master Portfolio, and the Money
Market Master Portfolio, respectively.
Each Fund bears a pro rata portion of the investment advisory fees paid by its
corresponding Master Portfolio as well as certain other fees paid by each
Portfolio, such as accounting, legal, and SEC registration fees.
Under an Administrative Services Agreement between the Trust and XAM, XAM
assumes all ordinary recurring operating expenses of the Trust, such as
administration fees, custodian fees, director's fees, transfer agency fees and
accounting fees. As compensation for these services, XAM receives a monthly fee
from each Fund at an annual rate based on the average daily net assets of each
Fund as follows; 0.23%, 0.32%, and 0.35% for the S&P 500 IndX Fund, the Bond
IndX Fund, and the Money Market Fund, respectively.
Investors Bank & Trust Company (the "Administrator") provides administrative
services to the Fund. Services provided by the Administrator include, but are
not limited to: managing the daily operations and business affairs of the Fund,
subject to the supervision of the Board of Trustees; overseeing the preparation
and maintenance of all documents and records required to be maintained by the
Fund; preparing or assisting in the preparation of regulatory filings,
prospectuses and shareholder reports; and preparing and disseminating material
for meetings of the Board of Trustees and shareholders.
X.com Bank serves as the shareholder-servicing agent for the Fund. X.com Bank is
also responsible for maintaining the Fund's shareholder accounts.
3. FEDERAL TAXES
The Funds have elected and intend to qualify each year as "regulated investment
companies" under Subchapter M of the Internal Revenue Code. If so qualified, the
Funds will not be subject to federal income tax to the extent they distribute
their net investment income to shareholders.
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
X.com Funds
We have audited the accompanying statements of assets and liabilities of X.com
Free +1 S&P 500 Fund, X.com U.S. Bond Fund, and X.com Money Market Fund (each a
series of X.com Funds) as of September 10, 1999. These financial statements are
the responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and the perform the audit to obtain
reasonable assurance about whether the statements of assets and liabilities are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of X.com Free
+1 S&P 500 Fund, X.com U.S. Bond Fund, and X.com Money Market Fund as of
September 10, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Boston, Massachusetts
September 10, 1999
43
<PAGE>
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 and Prime-1 Commercial Paper Ratings
The rating A-1 (including A-1+) is the highest commercial paper rating assigned
by S&P. Commercial paper rated A-1 by S&P has the following characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of
borrowing;
o basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances;
o typically, the issuer's industry is well established and the issuer
has a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1 that are
determined by S&P to have overwhelming safety characteristics are designated
A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be o inherent in certain
areas;
o evaluation of the issuer's products in relation to competition and
customer acceptance; liquidity;
o amount and quality of long-term debt;
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships which exist
with the issuer; and
o recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to
meet such obligations.
DESCRIPTION OF BOND RATINGS
Bonds are considered to be "investment grade" if they are in one of the top four
ratings.
S&P's ratings are as follows:
o Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
o Bonds rated AA have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
o Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
o Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
o Debt rated BB, B, CCC, CC or C is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse debt conditions.
The rating C1 is reserved for income bonds on which no interest is being paid.
Debt rated D is in default and payment of interest and/or repayment of principal
is in arrears.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Moody's ratings are as follows:
o Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
o 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.
o Bonds which are rated A possess many favorably 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
some time in the future.
o Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
o Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
o Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
o Bonds which are rated Ca represent obligations which are speculative
to a high degree. Such issues are often in default or have other
marked shortcomings.
o Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its 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 rating category.
November 23, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: X.com Funds (the "Trust")
(File Nos. 33-80205 and 811-09381)
Dear Ladies and Gentlemen:
Attached for filing on behalf of the Trust, pursuant to Rule 497(c)
under the Securities Act of 1933, as amended, are the definitive Prospectus and
Statement of Additional Information, each dated November 18, 1999, for the
Trust.
No fee is required in connection with this filing. Should you have any
questions regarding this filing please contact the undersigned at (202)
261-3328.
Very truly yours,
/s/David J. Lekich
------------------
David J. Lekich
