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As Filed with the Securities and Exchange Commission on March 24, 2000
File Nos. 333-80205
811-09381
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 2
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3
X.COM FUNDS
(Exact name of Registrant as specified in charter)
394 University Avenue
Palo Alto, CA 94301
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (650) 752-6900
JOHN T. STORY
X.com Corporation
394 University Avenue
Palo Alto, CA 94301
(Name and address of agent for service)
Please send copy of all communications to:
David A. Hearth, Esq.
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, California 94104
(415) 835-1600
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
____ on __________ pursuant to Rule 485(b)
__X_ 60 days after filing pursuant to Rule 485(a)(1)
____ 75 days after filing pursuant to Rule 485(a)(2)
____ on __________ pursuant to Rule 485(a)
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X.COM FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:*
Facing Sheet
Contents of Registration Statement
Part A - Prospectus for X.COM INTERNATIONAL INDEX FUND
Part B - Statement of Additional Information for X.COM INTERNATIONAL
INDEX FUND
Part C - Other Information
Signature Page
Exhibits
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*This post-effective amendment does not contain the combined
prospects and combined statement of additional information with
respect to the following series of the Registrant: X.COM PREMIER S&P
500 FUND, X.COM U.S.A. BOND FUND and X.COM U.S.A. MONEY MARKET FUND.
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PART A
PROSPECTUS FOR
X.COM INTERNATIONAL INDEX FUND
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X.COM INTERNATIONAL INDEX FUND
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PROSPECTUS
MARCH __, 2000
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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
<TABLE>
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PAGE
<S> <C>
INTRODUCTION...........................................................1
ABOUT THE FUND.........................................................2
PERFORMANCE INFORMATION................................................4
FEES AND EXPENSES......................................................5
MORE ABOUT THE FUND'S INVESTMENT STRATEGIES AND RISKS..................7
FUND MANAGEMENT........................................................8
THE FUND'S STRUCTURE...................................................9
PRICING OF FUND SHARES................................................10
HOW TO BUY AND SELL SHARES OF THE FUND................................10
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................13
TAX CONSEQUENCES......................................................14
</TABLE>
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INTRODUCTION
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WHO CAN INVEST IN THE FUND?
The Fund is for on-line investors who 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"). You will need to do the following to purchase shares of the Fund:
- Open an account with the Bank.
- Complete an X.com Account Application and follow the
instructions provided under "How to Buy and Sell Shares" later
in this Prospectus.
- Simply follow the instructions on the X.com website, WWW.X.COM.
- 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 Fund
may, to the extent permitted by the federal securities laws,
redeem your shares, and will, in any event, prohibit additional
investments in the Fund, including the reinvestment of
dividends.*
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 the targeted index or a highly representative sample. In
the case of the Fund, that benchmark is the Morgan Stanley Capital International
EAFE-Registered Trademark- Index (the "EAFE index").
WHAT IS THE MASTER/FEEDER FUND STRUCTURE USED BY THE FUND?
The Fund is a feeder fund that invests all of its 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 instead of directly buying portfolio securities.
Barclays Global Fund Advisors ("BGFA") serves as the investment adviser to the
master fund. BGFA is a subsidiary of Barclays Global Investors, N.A. As of
December 31, 1999, BGFA and its affiliates provided investment advisory services
for over $__________ billion of assets.
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* The staff of the Securities and Exchange Commission (the "Staff") has
informally said that the Fund 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 Fund intends to
involuntarily redeem your shares under these circumstances.
1
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ABOUT THE FUND
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This portion of the Prospectus provides a description of the Fund's investment
objective, principal investment strategies and principal risks. Of course, there
can be no assurance that the Fund will achieve its investment objective.
The investment characteristics and investment risks of the Fund match those of
the Master Portfolio. For that reason, the discussion of the Fund's investment
objectives, strategies and risks necessarily includes a description of the
investment characteristics and risks associated with the investments of the
Master Portfolio. The Fund's performance will correspond directly to the
performance of the Master Portfolio.
PLEASE NOTE THAT YOUR INVESTMENTS IN THE FUND 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
THE FUND IS SUBJECT TO INVESTMENT RISKS, YOU MAY LOSE MONEY IF YOU INVEST IN THE
FUND.
INVESTMENT OBJECTIVE
The X.com International Index Fund (the "Fund") seeks to approximate, as
closely as practicable, after fees and expenses, the CAPITALIZATION-WEIGHTED
TOTAL RATE OF RETURN of the MSCI EAFE-Registered Trademark- (Europe,
Australasia, Far East) Index.* The EAFE-Registered Trademark- Index, a widely
recognized benchmark for foreign stocks, includes over 1,000 established
companies representing different sectors of the world economy in 21 developed
markets.
"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.
PRINCIPAL STRATEGIES
The 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 EAFE-Registered Trademark- Index Master Portfolio ("Master Portfolio"), a
series of Master Investment Portfolios, a registered open-end management
investment company issuing individual interests in multiple series. The
Master Portfolio seeks to provide investment results that correspond, after
fees and expenses, to the total return of the publicly traded common stocks,
in the aggregate, as represented by the EAFE-Registered Trademark- Index. To
do so, the Master Portfolio invests substantially all of its assets in the
same stocks and in substantially the same percentages as the EAFE-Registered
Trademark- Index.
Under normal market conditions, the Master Portfolio will invest at least 90%
of its assets in the stocks making up the EAFE-Registered Trademark- Index.
Over time, the Master Portfolio attempts to achieve, in
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* "Morgan Stanley Capital International," "MSCI," "MSCI EAFE-Registered
Trademark- (Europe, Australasia, Far East)" and "EAFE-Registered
Trademark-" are trademarks of Morgan Stanley Capital International. The
Fund is not sponsored, endorsed, sold, or promoted by Morgan Stanley
Capital International and Morgan Stanley Capital International makes no
representation regarding the advisability of investing in the Fund.
2
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both rising and falling markets, a correlation of at least 95% between the
capitalization-weighted total return of its assets and that of the
EAFE-Registered Trademark- Index. A correlation of 100% would mean the total
return of the Master Portfolio's assets would increase and decrease exactly
the same as the EAFE-Registered Trademark- Index.
PRINCIPAL RISKS
MARKET RISK: The value of an investment in the Fund depends to a great extent
upon changes in market conditions. Equity securities change in value more
than fixed-income securities and the value of the equity securities held by
the Fund (through its investments in the Master Portfolio) will fluctuate as
the market prices of those securities rise and fall. The value of your
investment in the Fund will change daily based on many factors, including the
volatility of the securities in the EAFE-Registered Trademark- Index,
national and international economic conditions, and general market conditions.
FOREIGN RISK: By emphasizing investments in foreign stocks, the Fund may expose
shareholders to additional risks. Foreign stock markets tend to be more volatile
than the U.S. market due to economic and political instability and regulatory
conditions in some countries.
In addition, most of the securities in which the Master Portfolio invests are
denominated in foreign currencies, whose values may decline against the U.S.
dollar.
INDEX-FUND RISK: The Fund is not actively managed through traditional methods
of stock selection. Instead, the Fund invests (through its investments in the
Master Portfolio) in the stocks included in the EAFE-Registered Trademark-
Index regardless of their investment merits. Except to a limited extent, the
Fund cannot modify its investment strategies to respond to changes in the
economy and may be particularly susceptible to a general decline in the stock
markets of one or more countries represented in the EAFE-Registered
Trademark- Index.
The Fund's ability to track the performance of the EAFE-Registered Trademark-
Index may also be affected by, among other things, transaction costs, the
fees and expenses of the Fund and the Master Portfolio, changes in the
composition of the EAFE-Registered Trademark- Index or the assets of the
Master Portfolio, and the timing, frequency and amount of investor purchases
and redemptions of both the Fund and Master Portfolio. Because the Master
Portfolio seeks to track the performance of the EAFE-Registered
Trademark-Index, the Master Portfolio will not attempt to judge the merits of
any particular stock as an investment.
In addition, the Master Portfolio will need to maintain cash balances to pay
redemptions and expenses, which may affect the overall performance of the Fund.
MANAGER RISK: The Master 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
EAFE-Registered Trademark-Index. As a practical matter, the Master Portfolio
cannot own all the securities that make up the EAFE-Registered Trademark-
Index in perfect correlation to the index and, in order to replicate the
index, the manager uses computerized, quantitative techniques establishing an
"indexing" investment approach to determine which securities are to be
purchased or sold to achieve its goal. To the extent that the these
techniques fail to accurately replicate the EAFE-Registered Trademark- Index
or the
3
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manager errs in following the indexing approach to the investments, the
Master Portfolio may perform differently than the EAFE-Registered Trademark-
Index.
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PERFORMANCE INFORMATION
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The bar chart on this page shows the annual returns of the Fund and how its
performance has varied from year to year.* The average annual return table
compares the Fund's average annual return with the return of a corresponding
index for one and five years and since inception. How the Fund has performed in
the past does not necessarily indicate how the Fund will perform in the future.
[Bar Graph, data represent as a table in EDGAR]
<TABLE>
<S> <C>
1994 4.28%
1995 6.01%
1996 5.45%
1997 5.68%
1998 5.61%
</TABLE>
<TABLE>
<CAPTION>
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International Index Fund Portfolio Average Annual Total Returns (as of December 31, 1999)
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One Year Five Years Since .......
<S> <C> <C> <C>
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International Index Fund ____% ____% ____%
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EAFE-Registered Trademark- Index ____% ____% ____%
- ------------------------------------- ------------- ---------------- ----------------
</TABLE>
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* The Fund did not offer shares to the public before March __, 2000. The
Fund, in providing performance information, is using the annual returns of
Master Portfolio, which has not been adjusted to account for expenses payable
at the Fund level. The annual returns for the Fund would have been lower than
those shown above because it has higher expenses than the Master Portfolio.
4
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FEES AND EXPENSES
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<S> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed in Reinvested Dividends None
and other Distributions
Redemption Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES(1)
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 0.60%(2)
Distribution (12b-1) Fees None
Other Expenses 0.00%
Total Annual Fund Operating Expenses 0.60%
Fee Waiver and Expense Reimbursement(3) 0.27%
NET OPERATING EXPENSES 0.33%
</TABLE>
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1 The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
2 Management fees include a fee equal to 0.25% of the daily net assets
payable at the Master Portfolio level to the investment adviser for the
Master Portfolio. Management fees also include a "unified" fee equal to
0.35% payable by the Fund, to X.com Asset Management, Inc., the Fund's
investment adviser (the "Adviser"). Under the investment advisory
contract, the Adviser provides or arranges to be provided to the Fund
administration, transfer agency, pricing, custodial, auditing, and legal
services, and is responsible for payment of all of the operating
expenses of the Fund except the Master Portfolio management fees,
brokerage fees, taxes, interest and extraordinary expenses.
3 The fee waiver for the 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.
5
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EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that:
- you invest $10,000 in the Fund for the time periods
indicated;
- your investment has a 5% return each year; and
- the Fund's operating expenses remain the same, except for the
reduction applicable to at least the first year; and
- you redeem your shares at the end of the relevant period
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR* 3 YEARS*
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<S> <C> <C>
$34 $165
</TABLE>
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* Reflects costs at both the Fund and Master Portfolio levels.
6
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MORE ABOUT THE FUND'S INVESTMENT STRATEGIES AND RISKS
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INVESTMENT OBJECTIVE AND STRATEGIES
As with all mutual funds, there can be no assurance that the Fund will achieve
its investment objective. The investment objective of the Fund is not
fundamental and may be changed without approval of Fund shareholders. The Fund
may withdraw its investment in the Master 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 or strategies
of the Fund, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
INDEX INVESTING: The assets of the Master Portfolio are not actively managed.
Instead, the manager of the Master Portfolio seeks to achieve returns
corresponding to the targeted index 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 that index through
computerized, quantitative techniques. The Master Portfolio cannot, as a
practical matter, own all the securities that make up its market index in
perfect correlation to the index. The Master Portfolio seeks to track market
index during down markets as well as during up markets. Consequently, the return
of the Master Portfolio will be directly affected by the volatility of the
securities making up its market indexes.
The Master 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 targeted index.
ADDITIONAL STRATEGIES USED BY THE MASTER PORTFOLIO: The Master Portfolio may use
derivative instruments in order to: (i) simulate full investment in its 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. Those derivatives include the purchase and
sale of futures contracts and options on the targeted index.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, including the loss of
the principal amount invested. The performance per share of the Fund and Master
Portfolio will change daily based on many factors, including, but not limited
to, the quality of the instruments held by the Fund or the Master Portfolio and
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 Fund,
or protect their assets from declining in value. The Fund's 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
7
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or improper valuation and the risk that changes in the value of the
derivative instruments may not correlate perfectly with the Fund's
corresponding index. In fact, the use of derivative instruments may adversely
impact the value of the Fund's assets, which in turn would reduce the return
you receive on your investment.
The Master Portfolio's use of derivative instruments may adversely affect the
Fund's ability to track its index closely if the derivatives do not perform as
expected, or if the derivative instruments are timed incorrectly or are executed
under adverse market conditions. Further, the use of derivative instruments may
adversely impact the value of the Master Portfolio, which would cause the value
of your investment in the Fund to decline.
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FUND MANAGEMENT
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INVESTMENT ADVISER FOR THE FUND. Under an investment advisory agreement with the
Fund, X.com Asset Management, Inc. (the "Adviser"), a registered investment
adviser, provides investment advisory services to the Fund. The Adviser is a
wholly owned subsidiary of X.com Corporation ("X.com") and is located at 394
University Avenue, Palo Alto, CA 94301. The Adviser was formed in 1999 and
therefore has limited prior experience as an investment adviser.
X.com, a holding company, is the parent company of both the Adviser and First
Western National Bank (the "Bank"). 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, the Adviser offers access to your
Fund account virtually anywhere, at any time.
Subject to general supervision of the Fund's Board of Trustees and in accordance
with the investment objective, policies and restrictions of the Fund, the
Adviser provides the Fund with ongoing investment guidance, policy direction and
monitoring of the Master Portfolio in which the 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,
any subadviser and all other services necessary for the Fund to operate. For its
advisory services, the Fund pays the Adviser an investment advisory fee at an
annual rate of 0.35% which, after fee waivers and expense reimbursements, and
expressed as a percentage of the Fund's average daily net assets, equals 0.35%.*
Out of the fee received by the Adviser, the Adviser pays all expenses of
managing and operating the Fund except Master Portfolio expenses, 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.
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* 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 FUND. 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.
8
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INVESTMENT ADVISER FOR THE MASTER PORTFOLIO. Barclays Global Fund Advisors
("BGFA") is the investment adviser for the Master 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 the Master Portfolio at an annual rate equal to
0.25% of the Master Portfolio's average daily net assets.
The Fund bears a pro rata portion of the investment advisory fees paid by the
Master Portfolio, as well as certain other fees paid by the Master Portfolio,
such as accounting, legal, and Securities and Exchange Commission ("SEC")
registration fees.
The Fund's Statement of Additional Information contains detailed information
about the Fund's investment adviser, administrator, and other service providers.
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THE FUND'S STRUCTURE
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The Fund is a separate series of X.com Funds. The Fund seeks to achieve its
investment objective by investing all of the Fund's assets in the Master
Portfolio. The Master Portfolio is a series of Master Investment Portfolio
("MIP"), a registered open-end management investment company, with the same
investment objective as the 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, the Master 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 the 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 Fund's Board of Trustees (the "Board") believes that, as other investors
invest their assets in the Master Portfolio, certain economic efficiencies may
be realized with respect to the Master Portfolio. For example, fixed expenses
that otherwise would have been borne solely by the Fund (and the other existing
interest-holders in the Master Portfolio) would be spread across a larger asset
base as more funds or other accredited investors invest in the Master Portfolio.
However, if a mutual fund or other investor withdraws its investment from the
Master Portfolio, the economic efficiencies (E.G., spreading fixed expenses
across a larger asset base) that the Board believes should be available through
investment in the Master Portfolio may not be fully achieved or maintained.
The Fund may be asked to vote on matters concerning the Master Portfolio. Except
as permitted by the SEC, whenever the Fund is requested to vote on a matter
pertaining to the Master Portfolio, the Fund will hold a meeting of its
shareholders and, at the meeting of investors in the Master Portfolio, will cast
all of its votes in the same proportion as the votes of the Fund's shareholders.
9
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The Fund may withdraw its investments in the Master 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 Fund's assets in the Master Portfolio is not a fundamental
policy of the Fund and a shareholder vote is not required for the Fund to
withdraw its investment from the Master Portfolio.
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PRICING OF FUND SHARES
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The Fund is a true no-load fund, which means you may buy or sell shares directly
at the net asset value ("NAV") next determined after the Fund receives your
request in proper form. A request is received in proper form if it is placed
electronically through the X.com website and specifies the number of shares or
dollar amount of shares to be purchased or redeemed. If the Fund receives such
request before 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 generally not be priced on the days on which the NYSE is closed for
trading.
The Fund's investment in the Master Portfolio is valued based on the Fund's
ownership interest in the net assets of the Master Portfolio. The Fund's NAV per
share is calculated by taking the value of the Fund's net assets and dividing by
the number of shares outstanding. A market price may not be available for
securities that trade infrequently. In the absence of market pricing, the
Adviser, subject to the supervision of the Board of Trustees or Pricing
Committee, will make a good-faith estimate of the security's "fair value." That
value may be higher or lower than the security's closing price in its relevant
market. Expenses are accrued daily and applied when determining the Fund's NAV.
The NAV for the 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. The
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 most national holidays and on Good
Friday.
The Master Portfolio calculates its NAV on the same day and at the same time as
the Fund. The Master Portfolio's investments are valued each day the NYSE is
open for business. The Master 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.
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HOW TO BUY AND SELL SHARES OF THE FUND
- -------------------------------------------------------------------------------
The Fund is available only to on-line investors that have established a customer
relationship with X.com and opened an account with First Western National Bank
(the "Bank"), which is under contract to provide X.com customers with various
banking and financial services.
10
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ON-LINE INVESTOR REQUIREMENTS
The Fund is designed and built specifically for on-line investors. The 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 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 Bank account, the Fund may, to
the extent permitted by the federal securities laws, redeem your position in the
Fund and, in any event, will prohibit additional investments in the Fund,
including the reinvestment of dividends.* If it becomes lawful to involuntarily
redeem in these circumstances, prior to revoking your consent, you will be
reminded of the Fund's involuntary redemption policy. If the Fund involuntarily
redeems 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 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 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 made available over the Internet by X.com, including the
opportunity to invest in X.com Funds.
- -------------
* The SEC has informally indicated its view that the Fund 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 SEC's position on this issue change, the
Fund intends to involuntarily redeem your shares under such
circumstances.
11
<PAGE>
PLACING AN ORDER
You can begin purchasing shares of the Fund as soon as you open and fund your
account. Because the Fund's net asset value changes daily, your purchase price
will be the NAV next determined after the Fund receives and accepts your
purchase order.
You can place orders to purchase or redeem Fund shares by accessing the X.com
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 the Fund. When you purchase shares in the Fund, you will be asked: (1) to
confirm your 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 the X.com 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 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.
MINIMUM INVESTMENT REQUIREMENTS
<TABLE>
<S> <C>
For your initial investment in the Fund $1
To buy additional shares of the Fund $1
Continuing minimum investment $1
</TABLE>
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 Fund 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 the online assistant at WWW.X.COM available 24
hours a day.
REDEMPTIONS
You can access the money you have invested in the Fund at any time by selling
some or all of your shares back to the Fund. As soon as the 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
12
<PAGE>
check, until your check has cleared). The delay may take up to fifteen (15)
days from the date of purchase.
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 other
than for 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 Fund does not impose a redemption fee. The Fund 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 the Fund's investment program and create additional
transaction costs that are borne by all shareholders. For these reasons, in the
future the Fund 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 Fund against
fraudulent transactions by unauthorized persons. Specifically, the Fund 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 Fund intends to pay dividends from net investment income quarterly and
distribute capital gains, if any, annually. The Fund 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.
13
<PAGE>
- -------------------------------------------------------------------------------
TAX CONSEQUENCES
- -------------------------------------------------------------------------------
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's 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 Fund.
The Fund generally will not be required to pay income tax on amounts it
distributes to shareholders, although shareholders will be taxed on
distributions they receive.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. If the 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 the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If the 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 be required 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.
The 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, the 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.
14
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund ("SAI") contains further
information about the Fund. The SAI is incorporated into this Prospectus by
reference (that means it is legally considered part of this Prospectus).
Additional information about the Fund's investments will be available in the
Fund's annual and semi-annual reports to shareholders. In the 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 Fund (including the SAI) can also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. You may call
1-202-942-8090 for information about the operations of the public reference
room. Reports and other information about the Fund are also available on the
EDGAR database of 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 or by electronic request at the
following e-mail address: [email protected].
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
15
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION FOR
X.COM INTERNATIONAL INDEX FUND
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
X.COM INTERNATIONAL INDEX FUND
MARCH __, 2000
This Statement of Additional Information ("SAI") is not a prospectus. This
SAI should be read together with the Prospectus for the X.com International
Index Fund (the "Fund") dated March, 2000 (as amended from time to time).
To obtain a copy of the Fund's Prospectus and the Fund's most recent
shareholders' report (when issued) free of charge, please access our Website
online (WWW.X.COM) via e-mail. The Fund is for on-line investors that are
customers of First Western National Bank (the "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. Only investors who are customers of the
Bank and who consent to receive all information about the Fund electronically
may invest in the Fund.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
HISTORY OF THE FUND..........................................1
THE FUND.....................................................1
INVESTMENT STRATEGIES AND RISKS..............................1
FUND POLICIES...............................................10
TRUSTEES AND OFFICERS.......................................15
INVESTMENT MANAGEMENT.......................................17
SERVICE PROVIDERS...........................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION..............20
ORGANIZATION, DIVIDEND AND VOTING RIGHTS....................22
SHAREHOLDER INFORMATION.....................................23
TAXATION....................................................25
MASTER PORTFOLIO ORGANIZATION...............................29
PERFORMANCE INFORMATION.....................................31
FINANCIAL STATEMENTS........................................34
APPENDIX....................................................35
</TABLE>
i
<PAGE>
HISTORY OF THE FUND
The Fund 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 FUND
The Fund is classified as a diversified open-end, management investment
company.
MASTER PORTFOLIO. Master Investment Portfolio ("MIP") is an open-end
management investment company organized as a Delaware business trust. The
policy of the Fund to invest all of its assets in the Master Portfolio is not
a fundamental policy of the Fund and a shareholder vote is not required for
the Fund to withdraw its investment from the Master Portfolio.
The investment objective of the Fund is not fundamental and, therefore, may
be changed without approval of a majority (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) of the Fund's outstanding
voting interests.
INVESTMENT STRATEGIES AND RISKS
Because the Fund invests all its assets in the Master Portfolio, the
investment characteristics and investment risks of the Fund correspond to
those of the Master Portfolio. The following supplements the discussion in
the Prospectus of the principal investment strategies, policies and risks
that pertain to the Master Portfolio and, accordingly, to the Fund. In
addition to discussing the principal risks of investing in the Master
Portfolio and the Fund, 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.
FUTURES CONTRACTS AND OPTIONS TRANSACTIONS. The Master Portfolio 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 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
<PAGE>
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
Master Portfolio.
Although the Master Portfolio intends 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 the Master Portfolio to substantial
losses. If it is not possible, or if the Master Portfolio determines not to
close a futures position in anticipation of adverse price movements, the
Master Portfolio will be required to make daily cash payments on variation
margin.
The Master 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 Master Portfolio intends 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 Master 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.
The Master Portfolio's futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Master 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 the Master Portfolio's 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 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
Master Portfolio may be required to designate cash or liquid securities in
connection with its futures transactions in an amount generally equal to the
entire value of the underlying security.
2
<PAGE>
FUTURE DEVELOPMENTS. The Master Portfolio 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 the Master Portfolio or which are not currently available but which
may be developed, to the extent such opportunities are both consistent with
the Master Portfolio's investment objective and legally permissible for the
Master Portfolio. Before entering into such transactions or making any such
investment, the Fund will provide appropriate disclosure in its prospectus.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSACTIONS.
The Master Portfolio 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 Master Portfolio will generally purchase
securities with the intention of acquiring them, the Master Portfolio may
dispose of securities purchased on a when-issued, delayed-delivery or a
forward commitment basis before settlement when deemed appropriate by the
Master 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 Master Portfolio 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. The Master Portfolio does not
currently intend to invest more than 5% of its assets in when-issued
securities during the coming year. The Master Portfolio will designate cash
or liquid securities in an amount at least equal in value to the Master
Portfolio's commitments to purchase when-issued securities. If the value of
these assets declines, the Master Portfolio will designate additional liquid
assets on a daily basis so that the value of the assets in the account is
equal to the amount of such commitments.
BANK OBLIGATIONS. The Master Portfolio 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
3
<PAGE>
stated interest rate. Time deposits which may be held by the Master Portfolio
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.
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.
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. The Master
Portfolio 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 Master Portfolio
monitors on an ongoing basis the ability of an issuer of a demand instrument
to pay principal and interest on demand.
4
<PAGE>
The Master Portfolio 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 Master Portfolio 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 the
Master 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 Master
Portfolio. The investment adviser to the Master Portfolio will consider such
an event in determining whether the Portfolio should continue to hold the
obligation. To the extent the Master 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 Master Portfolio
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. The Master Portfolio may enter into a repurchase
agreement wherein the seller of a security to the Master Portfolio agrees to
repurchase that security from Master 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. The Master
Portfolio may enter into repurchase agreements only with respect to
securities that could otherwise be purchased by the Master 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 Master Portfolio 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
Master Portfolio's custodian has custody of, and holds in segregated
accounts, securities acquired as collateral by the Master Portfolio under a
repurchase agreement. Repurchase agreements are considered loans by the
Master Portfolio. All repurchase transactions must be 100% collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase
agreement, the Master Portfolio limits investments in repurchase agreements
to selected creditworthy securities dealers or domestic banks or other
recognized financial institutions. The Master 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. The Master Portfolio may purchase
floating-rate and variable-rate obligations as described in the Prospectus. The
Master Portfolio 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 Master Portfolio may
purchase floating- and variable-rate demand notes
5
<PAGE>
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 the Master Portfolio to invest fluctuating amounts,
which may change daily without penalty, pursuant to direct arrangements
between the Master Portfolio, as lender, and the borrower.
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 Master 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 Master
Portfolio 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 the Master Portfolio may invest.
BGFA, on behalf of the Master Portfolio, considers on an ongoing basis the
creditworthiness of the issuers of the floating- and variable-rate demand
obligations in the Master Portfolio's portfolio. The Master Portfolio will
not 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 MASTER PORTFOLIO SECURITIES. The Master Portfolio may lend
securities from its portfolios to brokers, dealers and financial institutions
(but not individuals) in order to increase the return on its portfolios. The
value of the loaned securities may not exceed one-third of the Master
Portfolio's total assets and loans of portfolio securities are fully
collateralized based on values that are marked-to-market daily. The Master
Portfolio will not 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, the Master Portfolio could experience delays in recovering
securities or collateral or could lose all or part of the value of the loaned
securities. The Master Portfolio 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.
In determining whether to lend a security to a particular broker, dealer or
financial institution, the Master Portfolio's investment adviser considers all
relevant facts and
6
<PAGE>
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 Master Portfolio
will not enter into any portfolio security lending arrangement having a
duration of longer than one year. Any securities that the Master Portfolio
may receive as collateral will not become part of the Master Portfolio's
investment portfolio at the time of the loan and, in the event of a default
by the borrower, the Master Portfolio will, if permitted by law, dispose of
such collateral except for such part thereof that is a security in which the
Master Portfolio is permitted to invest. During the time securities are on
loan, the borrower will pay the Master Portfolio any accrued income on those
securities, and the Master 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 Master Portfolio may invest in securities
issued by other open-end management investment companies which principally
invest in securities of the type in which the Master Portfolio invests. Under
the 1940 Act, the Master 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 the Master Portfolio's net
assets with respect to any one investment company and (iii) 10% of the Master
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. The Master Portfolio 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 Master Portfolio may invest up to
15% of the value of its 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 the Master 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. The Master Portfolio emphasizes the stocks of foreign
issuers and may include American Depositary Receipts and similar instruments,
which may subject the Master 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.
These 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
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
7
<PAGE>
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 Master
Portfolio 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 the Master Portfolio may invest. To the extent that such investments
are consistent with its investment objective, the Master Portfolio 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 the Master Portfolio's
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.
The Master Portfolio 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 Master Portfolio 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.
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
8
<PAGE>
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 Master
Portfolio may purchase instruments that are not rated if, in the opinion of
its investment advisor, such obligations are of investment quality comparable
to other rated investments that are permitted to be purchased by the Master
Portfolio. After purchase by the Master Portfolio, a security may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Master Portfolio. Neither event will require a sale of such security by
the Master Portfolio provided that when a security ceases to be rated, the
Board of Trustees for the Master 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 the Master Portfolio's best interests. In no event
will such securities exceed 5% of the Master 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 Master Portfolio 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 Master Portfolio is not required to sell downgraded securities,
the Master Portfolio could hold up to 5% of its 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 Master 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 Master
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, 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 the Master Portfolio to achieve its investment
objective may, to the extent the Master Portfolio holds low rated or unrated
low quality debt securities, be more dependent upon such creditworthiness
analysis than would be the case if the Master Portfolio held exclusively
higher rated or higher quality securities.
9
<PAGE>
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, the Master Portfolio may incur
additional expenses to seek recovery.
FUND POLICIES
FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUND
The following are the Fund's fundamental investment restrictions which, along
with the Fund's investment objectives, cannot be changed without shareholder
approval which would require a vote of a majority of the outstanding shares
of the 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 the 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.
Unless indicated otherwise below, the Fund may not:
1. with respect to 75% of its total assets, invest in the securities of any
one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be invested in such issuer
and the Fund would hold more than 10% of the outstanding voting securities of
that issuer. There are no limitations with respect to the remaining 25% of
its total assets, except to the extent other investment restrictions may be
applicable;
2. issue senior securities, as defined in the 1940 Act, except that this
restriction will not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into permissible
repurchase and dollar roll transactions;
3. borrow money, except to the extent permitted under the 1940 Act,
provided that the 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);
4. 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
10
<PAGE>
1933, as amended (the "Securities Act"), in connection with the disposition
of portfolio securities;
5. 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 (a) this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements thereto), and provided further
that (b) the Fund will concentrate in obligations to the same degree that the
Master Portfolio concentrates in those obligations during the same period;
6. 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;
7. invest in commodities. This restriction does not prohibit the Fund,
subject to restrictions described in the Prospectus and elsewhere in this
Statement of Additional Information, from purchasing, selling or entering
into futures contracts, options on futures contracts and other derivative
instruments, subject to compliance with any applicable provisions of the
federal securities or commodities laws;
8. lend any funds or other assets, except that the Fund 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 Fund;
9. borrow money, except for temporary or emergency purposes from a bank, or
pursuant to reverse repurchase agreements or dollar roll transactions and
then not in excess of one-third of the value of the total assets of the Fund
(including the proceeds of such borrowings, at the lower of cost or market
value). Any such borrowing will be made only if immediately thereafter there
is an asset coverage of at least 300% of all borrowings, and no additional
investments may be made while any such borrowings are in excess of 10% of
total assets. Transactions that are fully collateralized in a manner that
does not involved the prohibited issuance of a "senior security" within the
meaning of Section 18(f) of the 1940 Act will not be regarded as borrowings
for the purposes of this restriction; or
10. mortgage, pledge or hypothecate any of its assets except in connection
with permissible borrowings and permissible forward contracts, futures
contracts or other hedging transactions.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUND
The following are the Fund's non-fundamental operating restrictions, which may
be changed by the Fund's Board of Trustees without shareholder approval.
11
<PAGE>
1. The Fund 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 Fund's investment in such securities currently is
limited, subject to certain exceptions, to (a) 3% of the total voting stock
of any one investment company; (b) 5% of the Fund's net assets with respect
to any one investment company; and (c) 10% of the Fund's net assets in the
aggregate. Other investment companies in which the Fund invests 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. The 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. The Fund may lend securities from its portfolio to brokers, dealers,
financial institutions, in amounts not to exceed (in the aggregate) one-third
of the Fund's total assets. Any such loans of portfolio securities will be
fully collateralized based on values that are marked to market daily. The
Fund will not enter into any portfolio security lending arrangement having a
duration of longer than one year.
12
<PAGE>
MASTER PORTFOLIO POLICIES
THE MASTER PORTFOLIO: FUNDAMENTAL INVESTMENT RESTRICTIONS
The Master Portfolio is 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 the Master 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.
The Master Portfolio 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 the
Master Portfolio's total assets;
3. invest in commodities, except that the Master 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 the Master 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 Master Portfolio may borrow from banks 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, the Master 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 the Master Portfolio;
6. make loans to others, except through the purchase of debt obligations
and the entry into repurchase agreements. However, the Master Portfolio 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 Master Portfolio's
Board of Trustees;
7. act as an underwriter of securities of other issuers, except to the
extent that the Master Portfolio may be deemed an underwriter under the
Securities Act by virtue of disposing of portfolio securities;
13
<PAGE>
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; and (ii) any
industry in which the EAFE-Registered Trademark- 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 the Master
Portfolio's Fundamental Investment Restrictions Nos. 3 and 5 may be deemed to
give rise to a senior security; or
10. purchase securities on margin, but the Master 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.
THE MASTER PORTFOLIO: NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The Master Portfolio is subject to the following non-fundamental operating
policies which may be changed by the Board of Trustees of the Master Portfolio
without the approval of the holders of the Master Portfolio's outstanding
securities.
1. The Master 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 Master 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 Master Portfolio's
net assets with respect to any one investment company; and (iii) 10% of the
Master Portfolio's net assets in the aggregate. Other investment companies in
which the Master Portfolio invests 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 Master Portfolio.
2. The Master 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. The Master Portfolio may lend securities from its portfolio to brokers,
dealers, financial institutions, in amounts not to exceed (in the aggregate)
one-third of the Master Portfolio's total assets. Any such loans of portfolio
securities will be fully collateralized based on values that are marked to
market daily. The Master Portfolio will not enter into any portfolio security
lending arrangement having a duration of longer than one year.
14
<PAGE>
TRUSTEES AND OFFICERS
The Trust's Board of Trustees has the responsibility for the overall
management of the Fund, including general supervision and review of its
investment activities and the conformity with Delaware law and the stated
policies of the Fund. The Board of Trustees elects the officers of the Trust
who are responsible for administering the Fund's day-to-day operations.
Trustees and officers of the Fund, 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 (*):
<TABLE>
<CAPTION>
- ------------------------------ ---------------------------------- ----------------------------------------------
Name, Address, and Age Position(s) Held with the Fund Principal Occupation(s) During the Past 5
Years
- ------------------------------ ---------------------------------- ----------------------------------------------
<S> <C> <C>
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, X.com
Chairman of the Board of Trustees 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)
Gregory N. River Trustee Founder, Owner, and President, Paladin
Consulting Company (1996-present);
Consultant (investment services),
Self-Employed (1994-96).
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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 Fund. 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:
16
<PAGE>
ESTIMATED COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------- -----------------------------
Total Compensation From
Name of Person, Position Aggregate Compensation from Fund and Trust Expected to
the Fund be Paid to Trustees (1)
- -------------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Nicole E. Faucher $2,000 $2,000
Kevin T. Hamilton $2,000 $2,000
Gregory N. River $2,000 $2,000
</TABLE>
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's 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 the Fund's voting securities is in
control of the Fund on matters submitted to a vote of shareholders. Upon
commencement of operations and shortly after, X.com Asset Management, Inc.,
the Fund's investment adviser, will own 100% of the Fund's outstanding
shares. There are no other shareholders holding 25% or more.
INVESTMENT MANAGEMENT
INVESTMENT ADVISERS. Under an Investment Advisory Agreement ("Investment
Advisory Agreement") with the Trust, X.com Asset Management, Inc.
("Investment Adviser") provides investment advisory services to the Fund. The
Investment Adviser is a wholly owned subsidiary of X.com Corporation, 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 the
Fund, the Investment Adviser provides the Fund with ongoing investment
guidance, policy direction and monitoring of the Master Portfolio. 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 Fund to operate. The Investment Adviser has only limited experience
managing mutual funds beginning in November 1999.
17
<PAGE>
The Fund pays the Investment Adviser an annual investment advisory fee of
0.35%. In addition, 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 Fund over 0.60%.
THE MASTER PORTFOLIO'S INVESTMENT ADVISER. The Master Portfolio's investment
adviser 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 December 31,
1999, BGFA and its affiliates provided investment advisory services for over
$____ 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 Master
Portfolio, BGFA provides investment guidance and policy direction in
connection with the management of the Master Portfolio's assets. Pursuant to
the Advisory Contract, BGFA furnishes to the Master Portfolio's Board of
Trustees periodic reports on the investment strategy and performance of the
Master Portfolio. BGFA receives fees from the Master Portfolio at an annual
rate equal to 0.25% of the Master Portfolio's average daily net assets. This
advisory fee is an expense of the Master Portfolio borne proportionately by
its interestholders, including the Fund.
BGFA has agreed to provide to the Master Portfolio, among other things,
research, analysis and statistical and economic data and information
concerning interest rate and security market trends, portfolio composition,
credit conditions and average maturities of the Master Portfolio's investment
portfolio.
The Advisory Contract will continue in effect for the Master Portfolio
provided the continuance is approved annually (i) by the holders of a
majority of the Master Portfolio's outstanding voting securities or by the
Master Portfolio's Board of Trustees and (ii) by a majority of the Trustees
of the Master Portfolio who are not parties to the Advisory Contract or
affiliated with any such party. The Advisory Contract may be terminated on 60
days' 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 the Master 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 the
Master Portfolio or the price paid or received by the Master Portfolio.
18
<PAGE>
SERVICE PROVIDERS
ADMINISTRATOR OF THE FUND. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, MA 02111, serves as the Fund's administrator. As
the Fund's administrator, IBT provides administrative services directly or
through sub-contracting, including: (i) general supervision of the operation
of the Fund, 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
Fund.
ADMINISTRATOR OF THE MASTER PORTFOLIO. Stephens, Inc. ("Stephens"), and
Barclays Global Investors, N.A. ("BGI") serve as co-administrators on behalf
of the Master Portfolio. Under the Co-Administration Agreement between
Stephens, BGI and the Master Portfolio, Stephens and BGI provide as
administrative services, among other things: (i) general supervision of the
operation of the Master Portfolio, 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 Master Portfolio; and (iii)
general supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Master Portfolio's
officers and Board of Trustees. Stephens also furnishes office space and
certain facilities required for conducting the business of the Master
Portfolio together with those ordinary clerical and bookkeeping services that
are not furnished by BGFA. Stephens also pays the compensation of the Master
Portfolio's Trustees, 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 Master Portfolio and the Master
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
Master Portfolio deem to be an extraordinary expense.
CUSTODIAN AND FUND ACCOUNTING SERVICES AGENT. IBT also serves as custodian of
the assets of the Fund and the Master Portfolio. As a result, IBT has custody
of all securities and cash of the Fund and the Master Portfolio, 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 Fund and the Master Portfolio. The
custodian has no responsibility for any of the investment policies or
decisions of the Fund or the Master Portfolio. IBT also acts as the Fund's
Accounting Services Agent. The Investment Adviser pays IBT for all custodial
services provided to the Fund.
19
<PAGE>
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 Fund.
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 Fund's
shareholders and maintains the Fund's shareholder accounts. Such services
include, (i) answering shareholder inquiries regarding account status and
history, the manner in which purchases and redemptions of the Fund's shares
may be effected, and certain other matters pertaining to the Fund; (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 Fund's transfer agent; (iv) transmitting
shareholder's purchase and redemption orders to the Fund's 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 Fund's 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. _______________, 99 High Street, Boston, Massachusetts,
02110, acts as independent auditors for the Fund.
LEGAL COUNSEL. Paul, Hastings, Janofsky & Walker LLP, 345 California Street,
San Francisco, California 94104, acts as legal counsel for the Trust and the
Fund.
MASTER PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION
FOR THE MASTER PORTFOLIO. The Master Portfolio has 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 Master Portfolio's Board
of Trustees, BGFA, as investment adviser to the Master Portfolio (the "Master
Adviser"), is responsible for the Master Portfolio's investment portfolio
decisions and the placing of portfolio transactions. In placing orders, it is
the policy of the Master Portfolio 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 the Master Adviser
generally seeks reasonably competitive spreads or commissions, the Master
Portfolio will not necessarily be paying the lowest spread or commission
available.
Purchase and sale orders of the securities held by the Master Portfolio may
be combined with those of other accounts that the Master Adviser manages, and
for which it has brokerage placement authority, in the interest of seeking
the most favorable overall net results. When the Master Adviser determines
that a particular security should be bought
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or sold for the Master Portfolio and other accounts managed by the Master
Adviser, the Master Adviser undertakes to allocate those transactions among
the participants equitably.
Under the 1940 Act, persons affiliated with the Master Portfolio such as the
Master Adviser and their affiliates are prohibited from dealing with the
Master Portfolio 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 Master 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 Master
Portfolio 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
Master 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, affiliates of the Master Adviser.
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.
In placing orders for portfolio securities of the Master Portfolio, the
Master Adviser is required to give primary consideration to obtaining the
most favorable price and efficient execution. This means that the Master
Adviser 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 the Master Adviser generally seeks reasonably
competitive spreads or commissions, the Master Portfolio will not necessarily
be paying the lowest spread or commission available. In executing portfolio
transactions and selecting brokers or dealers, the Master Adviser seeks to
obtain the best overall terms available for the Master Portfolio. In
assessing the best overall terms available for any transaction, the Master
Adviser 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 Master
Portfolio's Board of Trustees.
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Certain of the brokers or dealers with whom the Master Portfolio may transact
business offer commission rebates to the Master Portfolio. The Master Adviser
considers such rebates in assessing the best overall terms available for any
transaction. The overall reasonableness of brokerage commissions paid is
evaluated by the Master Adviser 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 Fund is a 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 the 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.
Each share of the Fund represents an equal proportional interest in the Fund
and is entitled to such dividends and distributions out of the income earned
on the assets belonging to the Fund as are declared in the discretion of the
Trustees. In the event of the liquidation or dissolution of the Trust,
shareholders of the Fund are entitled to receive the assets attributable to
the 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 Fund 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
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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 the 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 Fund.
PRICING OF FUND SHARES. The net asset value per share of the Fund is
calculated as follows: all liabilities incurred or accrued are deducted from
the valuation of total assets, which includes accrued but undistributed
income; the resulting net assets are divided by the number of shares of the
Fund outstanding at the time of the valuation and the result (adjusted to the
nearest cent) is the net asset value per share.
As noted in the Prospectus, the net asset value of shares of the Fund
generally will be determined at least once daily as of 4:00 P.M., Eastern
time (or earlier when trading closes earlier), on each day the NYSE is open
for trading. It is expected that the NYSE will be closed on Saturdays and
Sundays and for New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The national bank holidays also include: Columbus Day and
Veterans' Day. The Fund may, but does not expect to, determine the net asset
values of its shares on any day when the NYSE is not open for trading if
there is sufficient trading in its portfolio securities on such days to
materially affect per-share net asset value.
The Fund will use the net asset value reported by the Master Portfolio for
its shares in calculating the Fund's net asset values.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Investment Adviser and the Trust's Board of Trustees or Pricing Committee
pursuant to procedures approved by or under the direction of the Board.
The Fund's equity securities, including ADRs, EDRs and GDRs, that are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean
between the last available bid and asked price. Equity securities that are
traded on more than one exchange are valued on the exchange determined by the
Investment Adviser to be the primary market. Securities traded in the
over-the-counter market are valued at the mean between the last available bid
and asked price prior to the time of valuation. Securities and assets for
which market quotations are not readily available (including restricted
securities that are subject to limitations as to
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their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In
addition, trading in and valuation of foreign securities may not take place
on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open
for trading and on which the Fund's net asset value is not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars
on a day on which the Fund calculates its net asset value may occur between
the times when such securities are valued and the close of the NYSE and will
not be reflected in the computation of the Fund's net asset value unless the
Board or its delegates deem that such events would materially affect the net
asset value, in which case an adjustment would be made.
Short-term debt obligations with remaining maturities in excess of 60 days
are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the
60th day, based on the value determined on the 61st day.
Corporate debt securities, U.S. government securities, mortgage-related
securities and asset-backed fixed-income securities held by the Fund are
valued on the basis of valuations provided by dealers in those instruments,
by an independent pricing service, or at fair value as determined in good
faith by procedures approved by the Board. Any such pricing service, in
determining value, will use information with respect to transactions in the
securities being valued, quotations from dealers, market transactions in
comparable securities, analyses and evaluations of various relationships
between securities and yield-to-maturity information.
An option that is written by the Fund is generally valued at the last sale
price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale
price or, in the absence of the last sale price, the last bid price. The
value of a futures contract equals the unrealized gain or loss on the
contract that is determined by marking the contract to the current settlement
price for a like contract on the valuation date of the futures contract if
the securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a
settlement price cannot be used, futures contracts will be valued at their
fair market value as determined by or under the direction of the Boards.
If any securities held by the Fund are restricted as to resale or do not have
readily available market quotations, the Investment Adviser and the Trust's
Board or Pricing Committee determine their fair value, following procedures
approved by the Board. The Trustees periodically review such valuations and
valuation procedures. The fair value of such securities is generally
determined as the amount which the Fund could reasonably expect to realize
from an orderly disposition of such securities over a reasonable period of
time. The valuation procedures applied in any specific instance are likely to
vary from
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case to case. However, consideration is generally given to the financial
position of the issuer and other fundamental analytical data relating to the
investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by the
Fund in connection with such disposition). In addition, specific factors are
also generally considered, such as the cost of the investment, the market
value of any unrestricted securities of the same class (both at the time of
purchase and at the time of valuation), the size of the holding, the prices
of any recent transactions or offers with respect to such securities and any
available analysts' reports regarding the issuer.
Any assets or liabilities initially expressed in terms of foreign currencies
are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a
regular participant in the foreign exchange market or on the basis of a
pricing service that takes into account the quotes provided by a number of
such major banks. If neither of these alternatives is available or both are
deemed not to provide a suitable methodology for converting a foreign
currency into U.S. dollars, the Board in good faith will establish a
conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
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 Fund 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
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shareholders in the 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 the lesser of (i) the amount of
market discount accruing during such period (plus any
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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 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
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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 Master Portfolio is a 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 Master Portfolio 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 Fund is requested to
vote on a matter with respect to the Master Portfolio, the Fund will hold a
meeting of Fund shareholders and will cast its votes as instructed by such
shareholders.
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In a situation where the Fund does not receive instruction from certain of
its shareholders on how to vote the corresponding shares of the Master
Portfolio, the Fund will vote such shares in the same proportion as the
shares for which the Fund does receive voting instructions.
MASTER/FEEDER STRUCTURE. The Fund seeks to achieve its investment objective
by investing all of its assets into the Master Portfolio. The Fund and other
entities investing in the Master Portfolio are each liable for all
obligations of such Master Portfolio. However, the risk of the 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
the Fund nor its shareholders will be adversely affected by investing Fund
assets in the Master Portfolio. However, if a mutual fund or other investor
withdraws its investment from the 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.
The Fund may withdraw its investment in the Master Portfolio only if the
Trust's Board of Trustees determines that such action is in the best
interests of the 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. The
Fund also may elect to redeem its interests in the 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, the 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 Fund 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.
PERFORMANCE INFORMATION
The Fund may advertise a variety of types of performance information as more
fully described below. All of the Fund's performance is historical and past
performance does not guarantee the future performance of the Fund. From time
to time, the Investment Adviser may agree to waive or reduce its management
fee and/or to reimburse certain
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<PAGE>
operating expenses of the Fund. Waivers of management fees and reimbursement
of other expenses will have the effect of increasing the Fund's performance.
AVERAGE ANNUAL TOTAL RETURN. The Fund's 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 the Fund 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
the Fund 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 the Fund's 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 the Fund's 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 the Fund have been
reinvested at net asset value of the Fund 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.
DISTRIBUTION RATE. The distribution rate for the Fund will be computed
according to a non-standardized formula by dividing the total amount of
actual distributions per share paid by the Fund over a twelve month period by
the Fund's net asset value on the last day of the period. The distribution
rate differs from the Fund's yield because the distribution rate includes
distributions to shareholders from sources other than dividends and interest,
such as short-term capital gains. Therefore, the Fund's distribution rate may
be substantially different than its yield. Both the Fund's yield and
distribution rates will fluctuate.
31
<PAGE>
PERFORMANCE COMPARISONS:
CERTIFICATES OF DEPOSIT. Investors may want to compare the 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 the
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, the
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. The Fund may be compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings. The Fund's performance may also
be compared to the average performance of its Lipper category.
MORNINGSTAR, INC. The 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 Fund, including
reprints of, or selections from, editorials or articles about the Fund.
Sources for fund performance and articles about the Fund 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.
INDICES. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that the 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
32
<PAGE>
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 the
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.
33
<PAGE>
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",
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 the Fund's relative performance. One
such measure is alpha. Alpha measures the actual return of a fund compared to
the expected return of the 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 Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund 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 Fund intends to disclose historical performance
of the Master Portfolio, including the average annual and cumulative returns
restated to reflect the expense ratio of the Fund. This information will be
included by amendment. Although the investments of the Master Portfolio will
be reflected in the Fund, the Fund is a distinct mutual fund and has
different fees, expenses and returns than the Master Portfolio. Historical
performance of substantially similar mutual funds is not indicative of future
performance of the Fund. Portfolio performance will be supplied by the Master
Portfolio.
FINANCIAL STATEMENTS
No financial statements have yet been prepared because the Fund has not
commenced operations.
34
<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:
- liquidity ratios are adequate to meet cash requirements;
- long-term senior debt is rated "A" or better;
- the issuer has access to at least two additional channels of
borrowing;
- basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances;
- typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and
- 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:
- evaluation of the management of the issuer;
- economic evaluation of the issuer's industry or industries
and an appraisal of speculative-type risks which may be
inherent in certain areas;
- evaluation of the issuer's products in relation to
competition and customer acceptance;
- liquidity;
- amount and quality of long-term debt;
- trend of earnings over a period of ten years;
- financial strength of parent company and the relationships
which exist with the issuer; and
- 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:
- Bonds rated AAA have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
35
<PAGE>
- 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.
- 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.
- 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.
- 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 are 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:
- 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.
- 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.
- Bonds which are rated A possess many favorably investment
attributes and are to be considered as upper medium grade
obligations. Factors
36
<PAGE>
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
37
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation
(i) Certificate of Trust -- 1
(ii) Trust Instrument -- 1
(iii) Amended and Restated Trust Instrument -- 2
(b) By-laws -- filed herewith
(c) Instruments Defining Rights of Security Holders -- 1
(d) Form of Investment Advisory Contract between X.com Asset
Management, Inc. and the Registrant -- 2
(e) Underwriting Contracts: Not applicable
(f) Bonus or Profit Sharing Contracts: Not applicable
(g) Form of Custodian Agreement between X.com Asset Management,
Inc., Investors Bank & Trust Company, and the Registrant -- 2
(h) Other Material Contracts:
(i) Form of Administration Agreement between X.com Asset
Management, Inc., Investors Bank & Trust, and the
Registrant -- 2
(ii) Form of Transfer Agency Agreement between X.com Asset
Management, Inc. and the Registrant -- 2
(iii) Form of X.com Funds Electronic Delivery Consent
Agreement -- 2
(iv) Form of Third Party Feeder Fund Agreement between
X.com Asset Management, Inc., Master Investment
Portfolio, and the Registrant - 2
(i) Opinion and Consent of Counsel
(i) With respect to: X.Com Premier S&P 500 Fund, X.Com
U.S.A. Bond Fund and X.Com U.S.A. Money Market
Fund -- 2
(ii) With respect to: X.com International Index
Fund - filed herewith
(j) Consent of Independent Auditors: Not applicable
(k) Omitted Financial Statements: Not applicable
(l) Form of Subscription Agreement between Elon R. Musk and the
Registrant -- 2
(m) Rule 12b-1 Plan: Not applicable
(n) Financial Data Schedules: Not applicable
(o) Rule 18f-3 Plan: Not applicable
<PAGE>
(p) Powers of Attorney -- 2
(i) Form of Power of Attorney for Nicole E. Faucher
(ii) Form of Power of Attorney for Kevin T. Hamilton
(iii) Form of Power of Attorney for Elon R. Musk
(iv) Form of Power of Attorney for Gregory N. River
(v) Form of Power of Attorney for John T. Story
1. Filed with initial Registration Statement on Form N-1A on June 8, 1999.
2. Filed with Pre-Effective Amendment No. 1 filed with the SEC on
November 18, 1999.
Item 24. Persons Controlled by or Under Common Control With Registrant
No person is controlled by or under common control with the Registrant.
Item 25. Indemnification
Reference is made to Article X of the Registrant's Trust Instrument.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and, public policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by trustees, officers or controlling persons of the Registrant in
connection with the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
Item 26. Business and Other Connections of Investment Adviser
X.com Asset Management, Inc. (the "Investment Adviser") is a Delaware
corporation that offers investment advisory services. The Investment Adviser's
offices are located at 394 University Avenue, Palo Alto, CA 94301. The directors
and officers of the Investment Adviser and their business and other connections
are as follows:
<TABLE>
<CAPTION>
Name Title/Status with Investment Adviser Other Business Connections
- ---- ------------------------------------ --------------------------
<S> <C> <C>
Elon R. Musk Director; President; Treasurer Trustee and Chairman of the Board,
X.com Funds; Chairman and Chief
Executive Officer, X.com Corporation
John T. Story Chief Operating Officer and Trustee and President, X.com Funds;
Chief Financial Officer Executive Vice President, X.com
Corporation
Mark Sullivan Secretary; Assistant Treasurer Vice President, Operations, X.com
Corporation
</TABLE>
<PAGE>
Item 27. Principal Underwriters
Shares of the Registrant (of each Fund) are self-distributed.
Item 28. Location of Accounts and Records
The account books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of X.com Asset
Management, Inc., 394 University Drive, Palo Alto, California 94301, and
Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts,
02111.
Item 29. Management Services
Not applicable
Item 30. Undertakings:
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Palo Alto in the State of California on the 22nd day
of March 2000.
X.COM FUNDS
(Registrant)
By: /s/ John T. Story*
------------------
Name: John T. Story
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ John T. Story* Trustee and President March 22, 2000
- ------------------
John T. Story
/s/ Jeff J. Gaboury* Treasurer and March 22, 2000
- -------------------
Jeff J. Gaboury Chief Financial Officer
/s/ Nicole E. Faucher* Trustee March 22, 2000
- ---------------------
Nicole E. Faucher
/s/ Kevin T. Hamilton* Trustee March 22, 2000
- ----------------------
Kevin T. Hamilton
/s/ Elon R. Musk* Trustee March 22, 2000
- -----------------
Elon R. Musk
/s/ Gregory N. River* Trustee March 22, 2000
- ---------------------
Gregory N. River
*By: /s/ Susan C. Mosher
--------------------
Susan C. Mosher,
Attorney-in-Fact, pursuant to
Power of Attorney previously
filed.
<PAGE>
BYLAWS
OF
X. COM FUNDS
(a Delaware Business Trust)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS........................................................1
ARTICLE II OFFICES...........................................................1
SECTION 1. RESIDENT AGENT...........................................1
SECTION 2. OFFICES..................................................1
ARTICLE III SHAREHOLDERS.....................................................1
SECTION 1. MEETINGS.................................................1
SECTION 2. NOTICE OF MEETINGS.......................................2
SECTION 3. RECORD DATE FOR MEETINGS AND OTHER PURPOSES..............2
SECTION 4. PROXIES..................................................2
SECTION 5. ACTION WITHOUT MEETING...................................3
ARTICLE IV TRUSTEES..........................................................4
SECTION 1. MEETINGS OF THE TRUSTEES.................................4
SECTION 2. QUORUM AND MANNER OF ACTING..............................5
ARTICLE V COMMITTEES.........................................................5
SECTION 1. EXECUTIVE AND OTHER COMMITTEES...........................5
SECTION 2. MEETINGS, QUORUM AND MANNER OF ACTING....................6
ARTICLE VI OFFICERS..........................................................6
SECTION 1. GENERAL PROVISIONS.......................................6
SECTION 2. TERM OF OFFICE AND QUALIFICATIONS........................7
SECTION 3. REMOVAL..................................................7
SECTION 4. POWERS AND DUTIES OF THE PRESIDENT.......................7
SECTION 5. POWERS AND DUTIES OF VICE PRESIDENTS.....................8
SECTION 6. POWERS AND DUTIES OF THE TREASURER.......................8
SECTION 7. POWERS AND DUTIES OF THE SECRETARY.......................8
SECTION 8. POWERS AND DUTIES OF ASSISTANT TREASURERS................9
SECTION 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES...............9
SECTION 10. COMPENSATION OF OFFICERS AND TRUSTEES AND
MEMBERS OF THE ADVISORY BOARD...........................9
ARTICLE VII FISCAL YEAR.....................................................10
ARTICLE VIII SEAL...........................................................10
ARTICLE IX WAIVERS OF NOTICE................................................10
ARTICLE X CUSTODY OF SECURITIES.............................................10
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 1. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT..........10
SECTION 2. PROVISIONS OF CUSTODIAN AGREEMENT.......................11
SECTION 3. ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES..........12
ARTICLE XI AMENDMENTS.......................................................12
ARTICLE XII INSPECTION OF BOOKS.............................................12
</TABLE>
<PAGE>
BYLAWS
OF
X.COM FUNDS
ARTICLE I
DEFINITIONS
Any terms defined in the Trust Instrument of X.COM Funds dated
_____, 1999, as amended from time to time, shall have the same meaning when
used herein.
ARTICLE II
OFFICES
SECTION 1. RESIDENT AGENT. The Trust shall maintain a resident agent
in the State of Delaware, which agent shall initially be The Corporation
Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The Trustees
may designate a successor resident agent, provided, however, that such
appointment shall not become effective until written notice thereof is
delivered to the office of the Secretary of State.
SECTION 2. OFFICES. The Trust may have its principal office and
other offices in such places within as well as without the State of Delaware
as the Trustees may from time to time determine.
ARTICLE III
SHAREHOLDERS
SECTION 1. MEETINGS. Meetings of the Shareholders shall be held as
provided in the Trust Instrument at such place within or without the State of
Delaware as the Trustees shall designate.
-1-
<PAGE>
SECTION 2. NOTICE OF MEETINGS. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder at his address as recorded
on the register of the Trust mailed at least ten (10) days and not more than
sixty (60) days before the meeting. Only the business stated in the notice of
the meeting shall be considered at such meeting. Any adjourned meeting may be
held as adjourned without further notice. No notice need be given to any
Shareholder who shall have failed to inform the Trust of his current address
or if a written waiver of notice, executed before or after the meeting by the
Shareholder or his/her attorney thereunto authorized, is filed with the
records of the meeting.
SECTION 3. RECORD DATE FOR MEETINGS AND OTHER PURPOSES. For the
purpose of determining the Shareholders who are entitled to notice of and to
vote at any meeting, or to participate in any distribution, or for the
purpose of any other action, the Trustees may from time to time close the
transfer books for such period, not exceeding sixty (60) days, as the
Trustees may determine; or without closing the transfer books the Trustees
may fix a date not more than sixty (60) days prior to the date of any meeting
of Shareholders or distribution or other action as a record date for the
determinations of the persons to be treated as Shareholders of record for
such purposes, subject to the provisions of the Trust Instrument.
SECTION 4. PROXIES. At any meeting of Shareholders, any holder of
Shares entitled to vote may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary
may direct, for verification prior to the time at which such vote shall be
taken. Proxies may be solicited in the name of one or more Trustees or one or
more of the officers of the Trust.
-2-
<PAGE>
Only Shareholders of record as of the record date shall be entitled to vote.
Each whole share shall be entitled to one vote as to any matter on which it
is entitled by the Trust Instrument to vote, and each fractional Share shall
be entitled to a proportionate fractional vote. When any Share is held
jointly by two or more persons, any one of them may vote at any meeting in
person or by proxy in respect of such Share, but if more than one of them
shall be present at such meeting in person or by proxy, and such joint owners
or their proxies so present disagree as to any vote to be cast, such vote
shall not be received in respect of such Share. A proxy purporting to be
executed by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise, and the burden of proving invalidity
shall rest on the challenger. If the holder of any such Share is a minor or
legally incompetent, and subject to guardianship or the legal control of any
other person as regards the charge or management of such Share, the person
may vote by his or her guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy. For purposes of
this Section, a proxy granted by telephone, telegram, telex, telecopy,
internet, computer interface or other electronic method of document transfer
shall be deemed "executed by or on behalf of a Shareholder."
SECTION 5. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if all Shareholders entitled to
vote on the matter consent to the action in writing and the written consents
are filed with the records of the meetings of Shareholders. Such consents
shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
-3-
<PAGE>
ARTICLE IV
TRUSTEES
SECTION 1. MEETINGS OF THE TRUSTEES. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the
President, or by any one of the Trustees, at the time being in office. Notice
of the time and place of each meeting other than regular or stated meetings
shall be given by the Secretary or an Assistant Secretary or by the officer
or Trustee calling the meeting and shall be mailed to each Trustee at least
two days before the meeting, or shall be sent by facsimile, telegraphed,
cabled, or sent by internet, computer interface or other electronic method of
document transfer to each Trustee at his business address, or personally
delivered to him or her at least one day before the meeting. Such notice may,
however, be waived by any Trustee. Notice of a meeting need not be given to
any Trustee if a written waiver of notice, executed by him or her before or
after the meeting, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him or her. A notice or waiver of notice
need not specify the purpose of any meeting. The Trustees may meet by means
of a telephone conference circuit or similar communications equipment by
means of which all persons participating in the meeting can hear one another.
Participation in a telephone conference meeting shall constitute presence in
person at such meeting. Any action required or permitted to be taken at any
meeting of the Trustees may be taken by the Trustees without a meeting if all
the Trustees consent to the action in writing and the written consents are
filed with the records of the Trustees' meetings. Such consents shall be
treated as a vote for all purposes.
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SECTION 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees
shall be present in person at any regular or special meeting of the Trustees
in order to constitute a quorum for the transaction of business at such
meeting and (except as otherwise required by law, the Trust Instrument or
these Bylaws) the act of a majority of the Trustees present at any such
meeting, at which a quorum is present, shall be the act of the Trustees. In
the absence of a quorum, a majority of the Trustees present may adjourn the
meeting from time to time until a quorum shall be present. Notice of an
adjourned meeting need not be given.
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<PAGE>
ARTICLE V
COMMITTEES
SECTION 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current
and ordinary business of the Trust while the Trustees are not in session,
including the purchase and sale of securities and the designation of
securities to be delivered upon redemption of Shares of the Trust, and such
other powers of the Trustees as the Trustees may, from time to time, delegate
to them except those powers which by law, the Trust Instrument or these
Bylaws they are prohibited from delegating. The Trustees may also elect from
their own number other Committees from time to time, the number composing
such Committees, the powers conferred upon the same (subject to the same
limitations as with respect to the Executive Committee) and the term of
membership on such Committees to be determined by the Trustees. The Trustees
may designate a chairman of any such Committee. In the absence of such
designation, the Committee may elect its own Chairman.
SECTION 2. MEETINGS, QUORUM AND MANNER OF ACTING. The Trustees may
(1) provide for stated meetings of any Committee, (2) specify the manner of
calling and notice required for special meetings of any Committee, (3)
specify the number of members of a Committee required to constitute a quorum
and the number of members of a Committee required to exercise specified
powers delegated to such Committee, (4) authorize the making of decisions to
exercise specified powers by written assent of the requisite number of
members of a Committee without a meeting, and (5) authorize the members of a
Committee to meet by means of a telephone conference circuit.
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<PAGE>
The Executive Committee shall keep regular minutes of its meetings
and records of decisions taken without a meeting and cause them to be kept
with the records of the Trust.
ARTICLE VI
OFFICERS
SECTION 1. GENERAL PROVISIONS. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the
business of the Trust may require, including one or more Executive Vice
Presidents, one or more Vice Presidents, one or more Assistant Secretaries,
and one or more Assistant Treasurers. The Trustees may delegate to any
officer or Committee the power to appoint any subordinate officers or agents.
SECTION 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise
provided by law, the Trust Instrument or these Bylaws, the President, the
Treasurer and the Secretary shall each hold office until his or her successor
shall have been duly elected and qualified, and all other officers shall hold
office at the pleasure of the Trustees. The Secretary and Treasurer may be
the same person. A Vice President and the Treasurer or Assistant Treasurer or
a Vice President and the Secretary or Assistant Secretary may be the same
person, but the offices of Vice President and Secretary and Treasurer shall
not be held by the same person. The President shall hold no other office.
Except as above provided, any two offices may be held by the same person. Any
officer may be, but none need be, a Trustee or Shareholder.
SECTION 3. REMOVAL. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer with or without cause, by a vote of a
majority of the Trustees then in
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office. Any officer or agent appointed by an officer or Committee may be
removed with or without cause by such appointing officer or Committee.
SECTION 4. POWERS AND DUTIES OF THE PRESIDENT. The President may
call meetings of the Trustees and of any Committee thereof when he or she
deems it necessary and shall preside at all meetings of the Shareholders.
Subject to the control of the Trustees and to the control of any Committees
of the Trustees, within their respective spheres, as provided by the
Trustees, he or she shall at all times exercise a general supervision and
direction over the affairs of the Trust. He or she shall have the power to
employ attorneys and counsel for the Trust and to employ such subordinate
officers, agents, clerks and employees as he may find necessary to transact
the business of the Trust. He or she shall also have the power to grant,
issue, execute or sign such powers of attorney, proxies or other documents as
may be deemed advisable or necessary in furtherance of the interests of the
Trust. The President shall have such other powers and duties as from time to
time may be conferred upon or assigned to him or her by the Trustees.
SECTION 5. POWERS AND DUTIES OF VICE PRESIDENTS. In the absence or
disability of the President, any Vice President designated by the Trustees
shall perform all the duties and may exercise any of the powers of the
President, subject to the control of the Trustees. Each Vice President shall
perform such other duties as may be assigned to him or her from time to time
by the Trustees and the President.
SECTION 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall
be the principal financial and accounting officer of the Trust. He or she
shall deliver all funds of the Trust which may come into his or her hands to
such Custodian as the Trustees may employ pursuant to
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<PAGE>
Article X of these Bylaws. He or she shall in general perform all the duties
incident to the office of Treasurer and such other duties as from time to
time may be assigned to him or her by the Trustees.
SECTION 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall
keep the minutes of all meetings of the Trustees and of the Shareholders
among the Trust records; he or she shall have custody of the seal of the
Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. He or she
shall attend to the giving and serving of all notices by the Trust in
accordance with the provisions of these Bylaws and as required by law; and
subject to these Bylaws, he or she shall in general perform all duties
incident to the office of Secretary and such other duties as from time to
time may be assigned to him or her by the Trustees.
SECTION 8. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence
or disability of the Treasurer, any Assistant Treasurer designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Treasurer. Each Assistant Treasurer shall perform such other duties as
from time to time may be assigned to him or her by the Trustees.
SECTION 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the
absence or disability of the Secretary, any Assistant Secretary designated by
the Trustees shall perform all the duties, and may exercise any of the
powers, of the Secretary. Each Assistant Secretary shall perform such other
duties as from time to time may be assigned to him or her by the Trustees.
SECTION 10. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable provisions of the Trust Instrument,
the compensation of the officers
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<PAGE>
and Trustees and members of any Advisory Board shall be fixed from time to
time by the Trustees or, in the case of officers, by any Committee or officer
upon whom such power may be conferred by the Trustees. No officer shall be
prevented from receiving such compensation as such officer by reason of the
fact that he or she is also a Trustee.
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ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of January
in each year and shall end on the 31st day of December in each year,
provided, however, that the Trustees may from time to time change the fiscal
year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the Trust
Instrument or these Bylaws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or sent by Internet, computer interface or other
electronic method of document transfer for the purposes of these Bylaws when
it has been delivered to a representative of the Trust or any telegraph or
cable company with instructions that it be telegraphed, cabled or sent by
other electronic method of document transfer.
ARTICLE X
CUSTODY OF SECURITIES
SECTION 1. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to
continue to serve, the Trustees shall promptly appoint a successor custodian,
but in the event that no successor custodian can be
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found who has the required qualifications and is willing to serve, the
Trustees shall call as promptly as possible a special meeting of the
Shareholders to determine whether the Trust shall function without a
custodian or shall be liquidated. If so directed by vote of the holders of a
majority of the outstanding voting securities, the Custodian shall deliver
and pay over all Trust Property held by it as specified in such vote.
SECTION 2. PROVISIONS OF CUSTODIAN AGREEMENT. The following
provisions shall apply to the employment of a Custodian and to any contract
entered into with the Custodian so employed:
The Trustees shall cause to be delivered to the Custodian all
securities included in the Trust Property or to which the Trust may become
entitled, and shall order the same to be delivered by the Custodian only in
completion of a sale, exchange, transfer, pledge, loan of portfolio
securities to another person, or other disposition thereof, all as the
Trustees may generally or from time to time require or approve or to a
successor Custodian; and the Trustees shall cause all funds included in the
Trust Property or to which it may become entitled to be paid to the
Custodian, and shall order the same disbursed only for investment against
delivery of the securities acquired, or the return of cash held as collateral
for loans of portfolio securities, or in payment of expenses, including
management compensation, and liabilities of the Trust, including
distributions to shareholders, or to a successor Custodian. In connection
with the Trust's purchase or sale of futures contracts, the Custodian shall
transmit, prior to receipt on behalf of the Trust of any securities or other
property, funds from the Trust's custodian account in order to furnish to and
maintain funds with brokers as margin to guarantee the performance of the
Trust's futures obligations in accordance with the applicable requirements of
commodities exchanges and brokers.
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<PAGE>
SECTION 3. ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES. Subject
to such rules, regulations and orders as the Commission may adopt, the
Trustees may direct the Custodian to accept written receipts or other written
evidences indicating purchases of securities held in book-entry form in the
Federal Reserve System in accordance with regulations promulgated by the
Board of Governors of the Federal Reserve System and the local Federal
Reserve Banks in lieu of receipt of certificates representing such securities.
ARTICLE XI
AMENDMENTS
These Bylaws, or any of them, may be altered, amended or repealed,
or new Bylaws may be adopted by (a) a vote of a majority of the Shares
outstanding and entitled to vote or (b) the Trustees, provided, however, that
no Bylaw may be amended, adopted or repealed by the Trustees if such
amendment, adoption or repeal requires, pursuant to law, the Trust Instrument
or these Bylaws, a vote of the Shareholders.
ARTICLE XII
INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to what
extent, and at what times and places, and under what conditions and
regulations the accounts and books of the Trust, or any of them, shall be
open to the inspection of the shareholders; and no shareholder shall have any
right of inspecting any account or book or document of the Trust except as
conferred by law or authorized by the Trustees or by resolution of the
Shareholders.
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<PAGE>
Law Offices of Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104-2635
Telephone: (415) 835-1600
Facsimile: (415) 217-5333
Internet: www.phjw.com
March 24, 2000
VIA EDGAR
Mr. John T. Story
X.com Funds
394 University Avenue
Palo Alto, California 94301
Re: X.com International Index Fund
------------------------------
Ladies and Gentlemen:
We have acted as counsel to X.com Funds, a Delaware business trust
(the "Trust"), in connection with Post-Effective Amendment Numbers 1 and 2 to
the Trust's Registration Statement filed on Form N-1A with the Securities and
Exchange Commission (the "Post-Effective Amendments") and relating to the
issuance by the Trust of an indefinite number of $0.01 par value shares of
beneficial interest (the "Shares") of the series of the Trust to be called
the X.com International Index Fund (the "Fund").
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of all natural persons, and
the conformity to the originals of all records, documents, and instruments
submitted to us as copies. We have based our opinion on the following:
(a) the Trust's Declaration of Trust, dated June 3, 1999, as amended
on September 3, 1999 (the "Declaration of Trust"). The Declaration of Trust,
as amended, has been in full force and effect from June 3, 1999, through the
date hereof;
(b) the Trust's Certificate of Trust as executed on June 3, 1999,
and originally filed with the Secretary of State of Delaware on June 7, 1999
(the "Certificate of Trust"). The Certificate of Trust has been in full
effect from June 7, 1999, through the date hereof;
(c) the Trust's Bylaws, which have been in full force and effect
without amendment from September 13, 1999, through the date hereof;
<PAGE>
X.com Funds
March 24, 2000
Page 2
(d) resolutions of the Trustees of the Trust adopted at meetings on
September 13, 1999, and March 6, 2000; and
(e) the Post-Effective Amendments.
Our opinion below is limited to the federal law of the United States
of America and the business trust law of the State of Delaware. We are not
licensed to practice law in the State of Delaware, and we have based our
opinion below solely on our review of Chapter 38 of Title 12 of the Delaware
Code and the case law interpreting such Chapter as reported in Delaware Laws
Annotated (Aspen Law & Business, 2000) as updated on WESTLAW (an electronic
database) on March 22, 2000. We have not undertaken a review of other
Delaware law or of any administrative or court decisions in connection with
rendering this opinion. We disclaim any opinion as to any law other than that
of the United States of America and the business trust law of the State of
Delaware as described above, and we disclaim any opinion as to any statute,
rule, regulation, ordinance, order or other promulgation of any regional or
local governmental authority.
Based on the foregoing and our examination of such questions of law
as we have deemed necessary and appropriate for the purpose of this opinion,
and assuming that (i) all of the Shares will be issued and sold for cash at
the per-share public offering price on the date of their issuance in
accordance with statements in the Trust's Prospectus included in the
Post-Effective Amendments and in accordance with the Declaration of Trust,
(ii) all consideration for the Shares will be actually received by the Trust,
and (iii) all applicable securities laws will be complied with, it is our
opinion that, when issued and sold by the Trust, the Shares will be legally
issued, fully paid and nonassessable.
This opinion is rendered to you in connection with the
Post-Effective Amendments and is solely for your benefit. This opinion may
not be relied upon by you for any other purpose or relied upon by any other
person, firm, corporation or other entity for any purpose, without our prior
written consent. We disclaim any obligation to advise you of any developments
in areas covered by this opinion that occur after the date of this opinion.
<PAGE>
X.com Funds
March 24, 2000
Page 3
We hereby consent to (i) the reference to our firm as Legal Counsel
in the Prospectus included in the applicable Post-Effective Amendments, and
(ii) the filing of this opinion as an exhibit to those Post-Effective
Amendments.
Very truly yours,
/s/ PAUL, HASTINGS, JANOFSKY & WALKER LLP
<PAGE>
March 23, 2000
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: X.Com Funds
File Nos. 333-80205 and 811-09381
---------------------------------
Ladies and Gentlemen:
Pursuant to Rule 461 under the Securities Act of 1933, the
above-referenced Registrant respectfully requests acceleration of the effective
date of its Registration Statement on Form N-1A, as amended by Post-Effective
Amendment No. 2, so that it will be declared effective on or about March 31,
2000 or as soon thereafter as possible.
Very truly yours,
X.COM FUNDS, as Registrant
By: /s/ John T. Story
-----------------------
John T. Story
President
X.com Funds, which does not use an underwriter, hereby certifies that
it does not have a principal underwriter for its shares and concurs in the
request for acceleration of the effective date of the Registrant's Registration
Statement, as amended by Post-Effective Amendment No. 2, to March 31, 2000, or
as soon thereafter as possible.
Very truly yours,
X.COM FUNDS,
a self-underwritten issue
By: /s/ John T. Story
-----------------------
John T. Story
President
